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	United Kingdom VAT & Duties Tribunals Decisions
You are here: BAILII >> Databases >> United Kingdom VAT & Duties Tribunals Decisions >> Ahmed (t/a New Touch) v Revenue & Customs [2007] UKVAT V20119 (24 April 2007) URL: http://www.bailii.org/uk/cases/UKVAT/2007/V20119.html Cite as: [2007] UKVAT V20119

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20119

Value added tax – input tax – section 24 VATA – regulation 29(2) Value Added Tax Regulations 1995 – claim for deduction of input tax where supplier a taxable person but not registered – whether deduction for input tax can be claimed as of right – no – Ellen Garage (Oldham) Ltd v C & E Commissioners considered – whether Commissioners have discretion as to evidence required in respect of charge to VAT – yes – whether discretion exercised reasonably – yes – appeal allowed in part

LONDON TRIBUNAL CENTRE

MASOOD AHMED trading as NEW TOUCH Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY'S

REVENUE AND CUSTOMS Respondents

Tribunal: EDWARD SADLER (Chairman)

R G GRICE

Sitting in public in Birmingham on 1 and 2 March 2007

Raza Mithani of Counsel instructed by Speechly Bircham, for the Appellant

Matthew Barnes of Counsel instructed by the Acting Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2007

DECISION

Introduction

1. This is an appeal by Mr Masood Ahmed trading under the business name New Touch ("the Appellant") against a VAT assessment made by the Commissioners of Her Majesty's Revenue and Customs ("the Commissioners") dated 28 June 2004. That assessment was made in consequence of a decision by the Commissioners to disallow as input tax claimed by the Appellant certain payments which the Appellant contends he made pursuant to invoices rendered to the Appellant by a trader carrying on business under the name Euro-tex ("Euro-tex"). The amount of input tax disallowed (and for which the assessment was made) is £72,951.00. In addition, the Appellant is assessed to interest, so that the total amount in dispute in this appeal is £76,692.85.
2. This case concerns the entitlement of a taxable person to claim as input tax amounts which he paid in good faith to a supplier who purported to charge him VAT when in fact the supplier was not registered for VAT. We are required to decide first in this case an important question of fact, namely whether or not the Appellant did in fact receive the supplies and make payment for them (including the purported VAT). If we decide against the Appellant on that question of fact then his appeal must be dismissed. If we find that the Appellant proves his case on the facts then we must determine how the law applies to those facts. The principal legal issues in this case are whether the Appellant has of right an entitlement to claim as input tax the purported VAT he paid, or whether he has no such entitlement; and if he has no such entitlement whether nevertheless the Commissioners have a discretion to allow him to claim those amounts as input tax, and if so, whether in this case the Commissioners acted unreasonably by failing to exercise that discretion in the Appellant's favour, so that their decision should be set aside.
3. In summary it is the Appellant's case that Euro-tex supplied the Appellant with goods (namely, items of clothing), and that the Appellant paid in cash the amounts invoiced by Euro-tex for those goods, including the VAT charged by Euro-tex in those invoices. The Appellant subsequently discovered from the Commissioners that although Euro-tex was registered for VAT purposes at the time the first two invoices were issued, the VAT registration of Euro-tex was then cancelled by the Commissioners. However, Euro-tex continued to issue invoices purporting to be VAT invoices, which the Appellant paid in good faith, having no knowledge of, or means of discovering, the changed VAT circumstances of Euro-tex until alerted to the situation by the Commissioners. This being so, the Appellant contends that since the value of the supplies made to him by Euro-tex exceeded the registration threshold, Euro-tex was required to be registered and therefore was a taxable person for VAT purposes, and in consequence the Appellant is entitled to claim as input tax all amounts charged to him as VAT by Euro-tex (whether Euro-tex charged him rightly so or not), relying on the principle established in the VAT tribunal case of Ellen Garage (Oldham) Ltd v Customs & Excise Commissioners [1994] VATTR 392 ("the Ellen Garage case"); alternatively, that he is entitled to claim as input tax the amounts charged to him as VAT by Euro-tex in respect of the initial two invoices (issued when Euro-tex remained VAT registered), and that in relation to the remaining invoiced amounts of purported VAT, the Commissioners have a discretion to allow those amounts as input tax and that in the circumstances of this case it would be unreasonable conduct on the part of the Commissioners if they failed to exercise that discretion in favour of the Appellant.
4. The Commissioners' case in summary is that, first, the Appellant has failed to prove that the supplies were made by Euro-tex and that the invoiced payments (including the initial two invoiced payments) were made: accordingly, no question of a claim for input tax arises. (The Commissioners do not allege that the Appellant has been party to any fraud on the revenue.) Further, even if the Appellant can establish that the supplies and invoiced payments were made as the Appellant contends, in relation to all but the initial two invoices there was no taxable supply by Euro-tex (which had then been de-registered and could no longer make taxable supplies or issue valid VAT invoices) and in those circumstances the Appellant has no entitlement to claim the purported VAT as input tax, and the Commissioners have no discretion to allow such a claim. The Commissioners argue that the Ellen Garage case is distinguishable on its facts, and does not assist the Appellant. Finally, the Commissioners argue that if this is a case where they have a discretionary power to accept evidence other than valid VAT invoices so as to allow the Appellant's claim for input tax, they have in the circumstances of this case exercised that power reasonably in reaching their decision not to accept such other evidence, and therefore the tribunal cannot set aside that decision.
5. It is our decision that the Appellant has established, to the required standard of proof, that Euro-tex made the supplies of goods in question and that the Appellant paid in cash the invoices (including purported VAT charged in those invoices) rendered by Euro-tex in respect of which the Appellant made his claim for input tax. In consequence the Appellant is entitled to a deduction as input tax for the VAT charged to him by the initial two invoices rendered by Euro-tex whilst it was registered for VAT, and we allow the Appellant's appeal in relation to that VAT. In relation to the remaining invoices, we decide that Euro-tex was a taxable person making a taxable supply, notwithstanding that it was not then registered: the value of its supplies exceeded the registration threshold, so that it was required to be registered. In these circumstances the Appellant does not have an entitlement to claim the VAT as input tax, but must rely on the discretion of the Commissioners as to the evidence they require to substantiate the supplies and the charge to VAT. In this case the Commissioners exercised their discretion reasonably, and we have no basis for setting aside their decision. Accordingly the Appellant's appeal fails in relation to these remaining invoices.

The relevant statutory provisions

6. The statutory provisions relevant to this appeal are as follows.
7. Section 4(1) of the Value Added Tax Act 1994 ("VATA") provides:

VAT shall be charged on any supply of goods or services made in the United Kingdom, where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him.

It should be noted at this point that section 3(1) VATA defines a taxable person as follows:

A person is a taxable person for the purposes of this Act while he is, or is required to be, registered under this Act.

8. Section 24(1) VATA provides the definition of input tax:

Subject to the following provisions of this section, "input tax", in relation to a taxable person, means the following tax, that is to say –

(a) VAT on the supply to him of any goods or services;

(b) …

(c) …,

being (in each case) goods or services used or to be used for the purposes of any business carried on or to be carried on by him.

9. There is provision in section 24(6)(a) VATA for regulations to determine how input tax is to be evidenced:

Regulations may provide –

(a) for VAT on the supply of goods or services to a taxable person…to be treated as his input tax only if and to the extent that the charge to VAT is evidenced and quantified by reference to such documents or other information as may be specified in the regulations or the Commissioners may direct either generally or in particular cases or classes of cases;

10. Regulations have been made under this provision concerning the documents which will evidence and quantify input tax. They are found in the Value Added Tax Regulations 1995, 1995/2518. Regulation 29 is headed "Claims for input tax", and the provisions relevant for the purposes of this appeal are as follows:

(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.

11. Regulation 13 is concerned with the obligations of the person making the supply to provide to his customer a VAT invoice. Regulation 13(1) is the only provision relevant to this appeal, and is in the following terms:

Save as otherwise provided in these Regulations, where a registered person –

(a) makes a taxable supply in the United Kingdom to a taxable person…

he shall provide such persons as are mentioned above with a VAT invoice….

12. Finally, Regulation 14 stipulates what must be the content of a VAT invoice:

(1) Subject to paragraph (2) below and regulation 16 and save as the Commissioners may otherwise allow, a registered person providing a VAT invoice in accordance with regulation 13 shall state thereon the following particulars –

There then follows a list of matters, such as the time of the supply; the name, address and registration number of the supplier; the name and address of the customer; a description of the goods; the amount payable for the goods (exclusive of VAT); and the total amount of VAT chargeable.

13. Thus in overview, the scheme of the legislation is that a taxable person can treat as input tax only that which is VAT charged on a supply of goods or services made to him (that is, VAT on a taxable supply made by a taxable person in the course of his business), where the VAT is evidenced and quantified by a valid VAT invoice which he holds (i.e. an invoice issued by a registered person, and stating the particulars specified by Regulation 14). However, the Commissioners treat the proviso to Regulation 29 as giving them a discretion to accept, in place of the VAT invoice, other evidence that the taxable person has paid VAT in order for him to claim that VAT as input tax.
14. This scheme of things presents few, if any, difficulties where the taxpayer receives a supply of goods or services made by a VAT-registered person in the course of his business – such a supply will be a taxable supply made by a taxable person, and he will issue a VAT invoice which is the evidence the taxpayer requires to claim the VAT as input tax. If for any reason the taxpayer cannot produce a VAT invoice (for example, because the supplier fails to provide it, or the taxpayer loses it), the taxpayer has to produce other evidence that the supply was made and the relevant VAT paid, and then rely on the Commissioners acting reasonably in the exercise of their discretion to accept such other evidence.
15. The difficulties arise, as in this case, where, although the taxpayer holds what purports to be a VAT invoice which relates to a payment made by him for supplies received, the supplies in question were made by a person who at that time was not VAT-registered. The question then is whether, nevertheless, those supplies are to be regarded as taxable supplies made by a taxable person (taking into account that the definition of taxable person extends to someone who, although not registered for VAT, is required to be so), and if they are, whether the taxpayer can rely on the purported VAT invoice to claim the amount stated as VAT as input tax, or whether he must produce other evidence and rely on the Commissioners' discretion.

The findings of fact

16. The first hurdle which the Appellant must surmount if his appeal is to succeed is to establish that Euro-tex made to him the supplies in question and that he paid Euro-tex the amounts (including the purported VAT charged) invoiced for those supplies. The burden of proof rests on the Appellant as he is seeking to claim relief for the input tax; and he must prove, to the standard of the balance of probability, that the facts are as he asserts them to be. At the hearing this issue occupied the greater part of the tribunal's time. (The Appellant argued that, in relation to the first two invoices, issued at the time Euro-tex remained registered for VAT purposes, the production of those invoices, being valid VAT invoices, was sufficient in itself to entitle him to claim the VAT in question as input tax. We deal with this point below. For immediate purposes in making the necessary findings of the facts we will proceed on the basis that the Appellant is required to prove that all supplies and all payments were in fact made.)

The evidence

17. The evidence before us comprised a bundle of documents prepared jointly by the parties, and the evidence of witnesses, their evidence in chief being in the form of witness statements. In place of a witness statement, one of the witnesses for the Appellant had produced in support of his evidence an extensive set of papers relating to his analysis of the financial workings and performance of the Appellant's business for the relevant period.
18. The documentary evidence was not in contention between the parties. It principally comprised the correspondence between the parties in the period leading up to the assessment under appeal; extracts from the notebook of the relevant officer of the Commissioners relating to meetings with the manager of the Appellant's business (and the file notes produced by the officer as his record of those meetings); a copy of the certificate of registration for value added tax issued in respect of Mohammad Yousaf trading as Euro-tex; and 45 sales invoices, each bearing the name of Euro-tex and a VAT registration number, and each addressed to New Touch, and dating from 10 March 2002 to 29 May 2003.
19. The Appellant provided evidence from eight witnesses: the Appellant himself, Mr Masood Ahmed, the owner of the New Touch business; Mr Javid Akhtar, who is Mr Massod Ahmed's brother and the manager of the business; Mr Andrew Pope, who, as a casual employee of the New Touch business, on occasion drove the business's van to collect goods from suppliers; Miss Paula Lovelady, an employee of the New Touch business who at the relevant time was responsible for labelling and coding goods delivered to the business; Mr Maqood Akhtar, the manager of a shop in Plymouth located in the vicinity of the New Touch shop in Plymouth; Mr Barry Joyce, a friend of Mr Javid Akhtar, who from time to time assisted in unloading goods at the New Touch shop in Plymouth; Mr Shahzad Ahmed, the nephew of Mr Masood Ahmed and Mr Javid Akhtar, who introduced Euro-tex to New Touch, and acted as a point of contact between the two businesses; and Mr Alan Roderick Thompson, a chartered accountant engaged by the Appellant for the purposes of the appeal to analyse the accounts of the business with a view to offering his opinion as to whether or not those accounts substantiated the Appellant's claims that the business had purchased and paid for the goods invoiced by Euro-tex.
20. For the Commissioners, Mr Barnes cross-examined all the Appellant's witnesses save for Mr Masood Ahmed, Mr Maqood Akhtar and Mr Barry Joyce. Mr Massod Ahmed has little by way of English language skills, and since his evidence was, in all material respects, replicated in the evidence of Mr Javid Akhtar (who in practice runs the business), Mr Barnes helpfully proposed that he would not cross-examine Mr Masood Ahmed, but that his evidence should be treated as challenged by the Commissioners to the extent that they challenged the like evidence of Mr Javid Akhtar.
21. The Commissioners had one witness, Mr Richard John Phillips, a long-standing and experienced officer of the Commissioners, who, as a VAT Assurance Officer was the officer responsible for the enquiries leading up to the disputed assessment and for the decision (which resulted in that assessment) to disallow as input tax the claim made by the Appellant in relation to the Euro-tex invoices. Mr Phillips was cross-examined by Mr Mithani, who appeared for the Appellant.

Facts not in dispute

22. The following outline facts were not in dispute between the parties:

(1) The Appellant has owned the New Touch business since June 2001. The business comprises retail trading in men's and women's fashion clothing and accessories such as shoes, aimed at the lower end of the market. The business operates from shops in the West Country (St Austell, Plymouth, Tavistock and Bridgewater) and from two market stalls in Plymouth. The business has an annual turnover of approximately £1,000,000. There are four permanent staff employed by the business and a number of part-time staff.

(2) The business is managed by Mr Javid Akhtar, the Appellant's brother, and he is responsible for the day to day running and operations of the business, including purchasing stock for the business and the financial management of the business.

(3) At all material times the Appellant was registered for VAT purposes.

(4) The business is to a significant extent conducted on a "cash" basis, that is, most sales are made for cash, and a significant proportion of purchases of stock are paid for in cash. The business purchases its stock from a wide variety of different sources: for example, in the quarter to 30 November 2002 there were approximately 20 firms making supplies of stock to the business, according to the purchase ledger maintained by the Appellant. Of these 20 suppliers two (if Euro-tex is treated as a supplier) are cash payment suppliers (the second being Classy Fashions Limited). In this quarter the Appellant was invoiced for goods to the value of £65,037 by Classy Fashions Limited, and (if Euro-tex is treated as a supplier) for goods to the value of £64,714 by Euro-tex.

(5) If in fact Euro-tex made the supplies which the Appellant claims it did, then the value of those supplies in the relevant period exceeded the threshold at which Euro-tex, if not then registered for VAT, would have been required by law to register for VAT.

(6) With effect from 1 December 2000 Mr Mohammad Yousaf, trading as Euro-tex, was registered for VAT purposes with the VAT registration number 759 3897 58 with an address in Manchester. The registration of Euro-tex was cancelled by the Commissioners on 3 April 2002 for the reason that Mr Yousaf, the proprietor, was a "missing trader".

(7) The Appellant holds documents which he claims are sales (and also VAT) invoices issued by Euro-tex in relation to purchases of clothing made by the Appellant. The Appellant has no other documentary evidence (such as delivery notes) of any purchases made from Euro-tex. On the basis of these invoice documents the Appellant claimed VAT as input tax in its VAT quarters 05/02, 08/02, 11/02, 02/03 and 08/03. The total input tax claimed was £72,951.

(8) There are 45 of these invoice documents, all in identical format. The first is dated 10 March 2002 and the last is dated 29 May 2003. The first two (dated 10 March 2002 and 29 March 2002) relate to the period before Euro-tex was de-registered for VAT. The amount shown on these two invoice documents as VAT charged to the Appellant is in aggregate £4,273.50.

(9) Each invoice document is in printed format, headed "Sales Invoice" and bearing the name and description: "Euro-tex Importers, Exporters and Wholesale Distributors of Textiles and Fashion Garments", with a logo. There is an address (on the early invoices in Stockport and on the later invoices in Manchester) and a telephone and fax number. The VAT registration number 759 3897 58 is shown. There is space for the purchaser's name and address and for the date to be inserted in manuscript. Short-form conditions of sale are shown at the foot of the invoice. There is a printed table (to be completed in manuscript) with column headings for Quantity, Description, Rate, Standard Rated Goods and Zero Rated Goods. At the foot the table provides for sub-totalling of the price of the goods, for the VAT charge in respect of the Standard Rated Goods, and for a Grand Total.

(10) Each invoice document has a stamped sequence number: for example, the invoice dated 10 March 2002 bears the number 0410, that dated 29 March 2002 the number 0420, and the final invoice held by the Appellant (dated 29 May 2003) the number 1342.

(11) In the case of each invoice document "New Touch" (without an address) and the date have been inserted in manuscript. Items of goods have also been inserted in manuscript in the relevant columns, for example: Quantity: 200 Description: L/Skirts Rate: £16.00 Standard Rated Goods: £3,200.00. The Standard Rated Goods column is sub- totalled, an amount for VAT at the standard rate is added, and the Grand Total shown, all in manuscript.

(12) Therefore, the invoice documents, if valid, comply with the requirements of Regulation 14 of the VAT Regulations 1995 as referred to above.

(13) One further matter has been added in manuscript to each invoice document, relating to payment: either "To Pay", or "Paid Cash", or in some instances both, as in "£5,500.25 Paid Cash To Pay £6,520.00".

(14) Mr Phillips began his investigation of the Appellant in early June 2003, initially to verify a repayment claim made by the Appellant in the VAT return made for the quarter 02/03. Mr Phillips dealt throughout with Mr Javid Akhtar. In July 2003 Mr Phillips discovered that Euro-tex had been de-registered in April 2002, although the Appellant was not advised of this until September 2003, when Mr Phillips asked the Appellant for alternative commercial evidence of the transactions with Euro-tex. The Appellant was unable to supply any such evidence, nor could he give details of Euro-tex beyond the information on the invoice documents. In late September the Appellant produced for Mr Phillips a faxed copy of the Certificate of Registration for VAT in respect of Euro-tex. Mr Phillips then asked the Appellant to provide further information about Euro-tex or Mr Mohammed Yousaf, but the Appellant was unable to do so, claiming that he had had no dealings with Euro-tex since May 2003, and that Mr Mohammed Yousaf had disappeared. On 28 May 2004 Mr Phillips made his decision to disallow the input tax in respect of all the Euro-tex invoices. On 28 June 2004 Mr Phillips wrote to the Appellant with the assessment disallowing the input tax, and against which the Appellant is now appealing.

The Appellant's evidence

23. The point at issue between the parties as to the facts is whether the purchases apparently evidenced by the invoice documents did in fact take place. The Appellant, as mentioned, has no other documentary evidence of the purchases. Further, since he says that all payments made to Euro-tex were made in cash (either against delivery of the goods or subsequently), no bank or other records (except for his purchase ledger book entries in his accounts) evidence payment. The Appellant therefore relies on the invoice documents themselves and the evidence of the witnesses produced at the hearing.
24. The evidence of Mr Javid Akhtar is that the Appellant buys stock from whatever supplier can provide it most cheaply. The business has a large and fluctuating number of suppliers, mostly from the Birmingham and Manchester areas. Some of the suppliers are corporate suppliers with whom there are more formal arrangements for ordering supplies, taking delivery and making payment. Other suppliers are small businesses and arrangements are informal. These suppliers are mostly within the Asian business community. The business rarely seeks out suppliers, as all the initiative comes from the suppliers, who will constantly call up by telephone offering supplies. If the Appellant agrees to take goods from a supplier, the suppliers will either deliver the goods to the Appellant (at the Plymouth shop premises, where they are then distributed around the Appellant's shops), or Mr Akhtar will travel to collect the goods. On average there are two or three deliveries a week to the Plymouth shop. In most cases where the suppliers are small businesses the only paperwork in relation to the purchase of goods is the sales invoice provided by the seller. Payment is either by cash or by cheque, usually against delivery, although where there are regular dealings with such a supplier some or all of the payment will be held over until the next delivery, and any inconsistencies between the goods delivered and the goods ordered will be resolved on the occasion of the next delivery – in effect there is an informal (and undocumented) running account maintained with each supplier which is built on trust between Mr Akhtar and the supplier. The Appellant does not keep information about its suppliers beyond that on the sales invoices. There is never a need for the business to take action to get in touch with the suppliers as they are constantly calling up wanting to offer goods.
25. Mr Akhtar was introduced to Mr Mohammed Yousaf, the proprietor of Euro-tex, in February 2002 by Mr Akhtar's nephew, Mr Shahzad Ahmed, who lives in the Manchester area. Thereafter Mr Yousaf called up either Mr Ahmed or Mr Akhtar offering supplies of clothing for the business. Mr Akhtar would indicate to Mr Ahmed the kind of clothing he was seeking for the business, and if suppliers in the Manchester area (including Euro-tex) called up Mr Ahmed offering clothing of that kind he would then agree to make a purchase. Sometimes Mr Akhtar would give Mr Ahmed the cash to make the purchase and he would take delivery of the goods; on other occasions Mr Akhtar would travel up from Plymouth to meet the supplier, take delivery of the goods and make payment, and on other occasions the supplier would deliver the goods to Plymouth and Mr Akhtar would make payment on or after delivery. The arrangements were flexible and various, and there was no set pattern. This was so in the case of the Euro-tex purchases. On the occasions when Mr Akhtar travelled up to Manchester to take delivery of goods from Euro-tex he did not visit any premises, but met the Euro-tex delivery van, driven either by Mr Yousaf or a driver.
26. The evidence of Mr Shahzad Ahmed is that in mid-February 2002 he attended a fashion show at the NEC in Birmingham with his uncle, Mr Javid Akhtar. There he met Mr Mohammed Yousaf, whom he had met previously through his local cricket club in the Burnley mid-week league (Mr Ahmed lives in Burnley). Mr Ahmed knew that Mr Yousaf was in the business of importing and selling fashion clothes, and so he introduced Mr Yousaf to Mr Akhtar as a possible new supplier.
27. Shortly thereafter Mr Yousaf called up Mr Ahmed offering to supply clothes, and that became the pattern for subsequent dealings, always at the initiative of Mr Yousaf. He would describe the stock he had available, and Mr Ahmed would then check this with Mr Akhtar's current needs. If Mr Akhtar was interested, he would provide Mr Ahmed with a substantial cash "float" (they would meet for the purpose in Manchester or Birmingham, when Mr Akhtar was visiting other suppliers), and Mr Ahmed had a discretion to purchase goods, taking into account their quality and the price. Mr Ahmed was not employed by the Appellant – he acted as a member of the family. The prices charged by Euro-tex were always very keen. Mr Yousaf always insisted on payment in cash. He would sometimes give credit, for example if Mr Ahmed, having seen the goods in the delivery van, was keen to purchase additional goods but the price exceeded his cash "float" at that time. In such cases the sales invoice would be marked to show the amount of cash paid and the amount to be paid, and any outstanding balance would be paid shortly thereafter, after Mr Akhtar had given the cash to Mr Ahmed. This was in accordance with the common way of doing business in certain parts of the fashion trade.
28. Mr Ahmed did not visit any Euro-tex premises. All dealings with Mr Yousaf were on the telephone, and collections were made from Euro-tex's van which was parked near Stevenson Square in Manchester, the centre of the fashion industry in the city. In the course of 2002 and 2003 Mr Ahmed made between five and eight separate purchases himself from Euro-tex in this way, but after the lapse in time he could no longer identify which of the Euro-tex invoices related to the purchases he had made.
29. Mr Ahmed was aware that Mr Yousaf also dealt directly with Mr Akhtar and that on occasion Euro-tex delivered goods to the Plymouth shop.
30. The last occasion on which Mr Ahmed met Mr Yousaf was in April 2003 at a cricket match. There were subsequent telephone calls from Mr Yousaf, but no further business dealings with him after the end of May 2003. In late summer of that year Mr Akhtar told Mr Ahmed something of the investigation by the VAT officers and asked him to help find out about the VAT position of Euro-tex. At that time Mr Yousaf was still calling about once a week offering supplies, and so Mr Ahmed asked him for some evidence of his VAT status. Mr Yousaf agreed to do this, and Mr Ahmed met one of the Euro-tex drivers who handed him a photocopy of the Euro-tex Certificate of Registration for VAT, which Mr Ahmed then sent to Mr Akhtar. A couple of weeks after this (October 2003) Mr Yousaf ceased telephoning Mr Ahmed, and he has had no dealings with him since.
31. The evidence of Mr Andrew Pope is that he is a self-employed builder by trade, but that he worked occasionally for the Appellant during the winter months as a driver collecting stock for the business from suppliers in Birmingham, Manchester and elsewhere. He travelled with Mr Javid Akhtar from Plymouth, sharing the driving. On several occasions he travelled to Manchester to take delivery from a supplier referred to by Mr Akhtar as Euro-tex. He could not now recall the dates, but he could recall these occasions because they were the only occasions when they took delivery from a van, which was parked in St Peter's Square in Manchester – all other collections were from anonymous warehouses. Mr Akhtar conducted the business with the van driver whilst Mr Pope remained in the New Touch van looking after the cash which Mr Akhtar had brought for payment. Mr Akhtar collected the cash to pay for the goods, and then Mr Pope helped transfer the boxes of clothes from the Euro-tex van to the New Touch van. They then drove back to Plymouth where Mr Pope helped unload the stock into the Plymouth shop.
32. The evidence of Miss Paula Lovelady is that she has worked for the Appellant since 2000. She has managed a number of the Appellant's shops, including the Plymouth shop. One of her responsibilities was to assist with deliveries of stock to the Plymouth shop and then to distribute stock to the other shops.
33. When deliveries of stock had been made to the Plymouth shop, Miss Lovelady would open the boxes of stock, and, using a gun-shaped labelling device called a Kimbelling machine, would print New Touch labels for each item of clothing in the box. To do this she would take all the necessary details from the delivery note or invoice that came with the box, or from an examination of the goods themselves (eg if they came in a standard bundle with a mixture of sizes, as in the case of supplies by Euro-tex), and print the labels accordingly. Thus, for example, if the stock comprised a box of 50 tee shirts in various sizes, she would use the Kimbelling machine to prepare individual labels showing the size and style of the tee shirts, the price and a code for the supplier. There was a different code for each supplier, and in the case of Euro-tex the code was the letter "E". This was printed on the label so that the managers of each shop could try to re-order further supplies of items which sold well. The system was not sophisticated, and it relied on the managers knowing their stock – the till roll, for example, referred only to types of clothing, not to particular suppliers.
34. Miss Lovelady recalled many deliveries made to the Plymouth shop by Euro-tex or in respect of their supplies during 2002 and 2003 when she was in the shop, although four years on she could not recall precise dates. She saw a van and the driver unload the stock and take it to the room used for storage of stock, and she opened the boxes and printed off Kimbell labels for the clothing, using the "E" code to indicate Euro-tex as the supplier. Some deliveries were made by Mr Shahzad Ahmed, but he made deliveries of clothes supplied by a number of suppliers, so she could not now be certain whether he had made deliveries of Euro-tex items.
35. Miss Lovelady visited the shops distributing stock delivered to the Plymouth shop. She also collected cash takings from the shops, and would have cash of up to £30,000 in sealed packets.
36. The evidence of Mr Barry Joyce stood as in his witness statement. There was not objection to his evidence by the Commissioners and he was not cross-examined. His evidence is that he is a friend of Mr Javid Ahktar who regularly visits the New Touch shop in Plymouth. If he was there and a delivery of supplies arrived, he would help unload the supplies. He remembers six or eight deliveries to the shop made by Euro-tex by a van driven by an Asian man. The stock was delivered in boxes, between eight and twenty in number. Mr Joyce helped to unload these deliveries, and checked off the number of boxes against a delivery note.
37. The evidence of Mr Thompson is that he was engaged by the Appellant in relation to the appeal to examine the accounts of the business to ascertain whether the accounts substantiated the Appellant's claim that he had purchased and paid for supplies from Euro-tex. Mr Thompson was not responsible for the accounts themselves (which had been prepared by Gee & Co, a firm of accountants in Manchester used for that purpose by the Appellant). He described his role as one of making due diligence enquiries, and to that end he had examined the accounts and bank statements of the Appellant, and made enquiries of the accountants and New Touch staff in order to understand the system adopted by the business for ordering and selling goods, for the payment for stock and other expenses by cash and by cheque, and the banking arrangements used by the business.
38. Mr Thompson had prepared analysis figures for the New Touch business for two quarters, the quarter ended 31 August 2002 and the following quarter ended 30 November 2002. His method, in summary, was to extract the transactions which could be verified from bank statements, leaving the transactions settled in cash with a view to determining whether the cash transactions were consistent with sales of stock supplied by Euro-tex and the Euro-tex invoices having been settled in cash.
39. For each quarter he first analysed the bank statements to ascertain the transactions where payments were made from the bank account (i.e. by cheque). He looked at the opening bank balance (in respect of the quarter which began 1 June 2002 this was a debit balance, that is, an overdraft, as reconciled to balance sheet of the business as at 31 May 2002) and the closing balance, and then he identified every bank receipt and bank payment appearing in the bank statements. In the case of payments made out of the bank account he identified those paid to suppliers of clothing and those paid to meet all the other expenses of the business. These payments were all reconciled with the supplier invoices as appearing in the purchase ledgers maintained by the business.
40. Mr Thompson carried out a similar exercise in relation to cash payments and receipts of the business. For this exercise, however, he was required to make various assumptions. First, he had to assume the likely cash in hand at the beginning of the quarter (this is not a figure which could be determined from the accounts). He relied on the Appellant for this, assuming a figure of £32,000, the Appellant having stated to him that the cash in hand figure fluctuates, but can exceed £30,000 (this figure was to a degree tested against a review of the cash transactions for the first week in June 2002). The cash takings from sales were then calculated, using for this purpose the figures for taxable supplies appearing in the Appellant's VAT return for the quarter (£358,829 for the quarter ended 31 August 2002). From the aggregate of the opening cash balance plus the cash takings there was deducted (i) the cash banked during the quarter (£137,790); (ii) the cash payments made to suppliers during the quarter, checked against invoices shown as cash paid and entered in the purchase ledgers (totalling £225,869, and including the Euro-tex invoices for the quarter); (iii) an amount for staff wages (the quarterly apportioned amount taken from the trading and profit and loss account for the year ended 31 May 2003), being £11,257; and (iv) an assumed figure for drawings during the quarter by the proprietor of £4,760 (this figure was entirely an estimate, as it could not be verified from the accounts). This resulted in a cash balance (i.e. cash in hand in the business) at the end of the quarter of £11,151.
41. Since this cash statement for the quarter ended 31 August 2002 was posited upon the assumption made as to the cash in hand at the opening of the quarter, Mr Thompson carried out an identical exercise (both as to bank and cash transactions) for the subsequent quarter. For the cash account he took the opening balance of £11,151 (that is, the closing cash balance from his calculations for the quarter ended 31 August 2002). The resulting closing balance of cash in hand in the business at the end of the quarter to 30 November 2002 was £4,865.
42. In Mr Thompson's opinion, although his figures showed a declining cash balance over the six months, the figures for the two quarters showed that the assumed opening cash balance was credible. Furthermore, the analysis of the cash figures for the two quarters, is, in his opinion evidence of the likelihood that the Euro-tex invoices were paid in cash when they were said to be paid. The amounts claimed to be paid to Euro-tex during this period were very substantial, and if those purchases of stock were not made from Euro-tex and if those amounts were not paid in cash to Euro-tex then the question has to be asked how the cash has been generated in sales, and where the cash generated has gone. The analysis exercise cannot provide definitive proof of payment of the Euro-tex invoices, since any such payment was made in cash, which leaves no "paper trail", but the analysis shows that the bank and cash figures, reconciled where possible to the accounting records, are consistent with the claim that stock was purchased and paid for in cash from Euro-tex in accordance with the invoices.

The Commissioners' evidence

43. Mr Phillips gave evidence for the Commissioners. Much of his evidence relates to the undisputed facts set out in paragraph 22 above. In relation to the Euro-tex invoices Mr Phillips said that in his experience he would expect a trader to have some further commercial evidence of trading with a supplier in addition to sales invoices (for example, delivery notes, or correspondence with the supplier) – this was so even in the clothing trade, where he accepted that a substantial amount of business is carried out in cash. He acknowledged, however, that in a cash transaction, where goods are paid for in cash on delivery, it is not commercially necessary to have paperwork beyond a receipted sales invoice. Furthermore, he would expect the trader to have basic contact information about the supplier, whereas in this case there was no information beyond that supplied on the invoices. It was also unusual, in his experience, for supplies to be collected from a van, rather than from premises.
44. As to the dealings with Euro-tex, Mr Phillips pointed out that according to the notes of his meetings in late 2003 with Mr Javid Ahktar all the dealings with Euro-tex were through Mr Ahmed. This was referred to by Mr Phillips in his letter dated 28 June 2004 to the Appellant, and in replying to that letter Gee & Co confirmed that Mr Ahmed was the representative of New Touch in purchasing goods from suppliers in the Manchester area, including Euro-tex. This was not consistent with the evidence now given by Mr Ahktar and Mr Ahmed.
45. Mr Phillips commented on the analysis made by Mr Thompson. He questioned, first, the opening cash balance, which Mr Thompson had set at £32,000, based on little more than the Appellant's say-so: over the six month period the cash balance, on Mr Thompson's figures, declined to a closing balance of £4,865. Clearly, if Mr Thompson had taken a lower opening balance that would have resulted in a negative cash balance at 30 November 2002. Secondly, Mr Phillips pointed out that the figures used for wages (which he accepted were not Mr Thompson's figures, but taken from the accounts) were questionable, since they amounted to a weekly wage bill of £144 for each retail outlet, which seemed a significant understatement. Finally, he questioned the estimated cash drawings figures used by Mr Thompson, which did not accord with the drawings figure of £28,012 given in the balance sheet of the accounts of the business for the year to 31 May 2002 (the figures for the subsequent year were not available in evidence). In Mr Phillips's view these factors threw into question the credibility of the figures used by Mr Thompson and the conclusions he drew from those figures as to the likelihood that the Euro-tex invoices were paid in cash.
46. Mr Philips was prepared to accept that the evidence put forward by the Appellant (including that from Mr Thompson) showed that there is a likelihood that some supplies were made for cash payment by a supplier, but not necessarily the supplies by Euro-tex claimed by the Appellant.

The parties' submissions on the evidence

47. In his submissions on the evidence, Mr Mithani for the Appellant made the following points:

(1) The Euro-tex invoices are, on their face, perfectly proper, with all the information required to constitute valid VAT invoices, including a VAT registration number which was on any basis valid for Euro-tex for the first two invoices, and there was nothing in subsequent invoices to suggest to the Appellant that Euro-tex had been de-registered.

(2) To disregard the Euro-tex invoices is to conclude that they are fictitious and that the Appellant is party to a fraud, but no evidence points to that conclusion.

(3) The absence of other documentary evidence of the Euro-tex supplies and payments should not be considered unusual in the context of a small Asian family enterprise doing business within the Asian community where matters are frequently conducted on the basis of trust and by word.

(4) The evidence of the witnesses for the Appellant as to the dealings with Euro-tex was convincing and all pointed to supplies having been made by Euro-tex. Any inconsistencies between the contemporaneous notes of Mr Phillips and the evidence presented at the hearing must be seen in the context of the witnesses recalling matters which occurred more than four years ago. Some apparent inconsistencies (such as that between the initial statements made to Mr Phillips to the effect that Mr Ahmed was the contact through whom the business with Euro-tex was conducted and the evidence that Mr Javid Akhtar himself dealt with Euro-tex) could reasonably be explained by misunderstanding – Mr Ahmed was seen as the principal personal contact with Mr Mohammad Yousaf: he made the introduction, conducted transactions, and was the person the Appellant turned to when he was trying to obtain evidence of Euro-tex's VAT "existence".

(5) Any criticism made by the Commissioners of the analysis produced by Mr Thompson (for example, as to the amount of wages, or the initial assumption as to the cash balance in the business) was of minor significance in the overall context. In overview, that analysis showed that the turnover of the business and its probable cash transactions supported the claim that a substantial amount of stock had been purchased and sold consistent with stock having the value shown on the Euro-tex invoices.

48. In his submissions on the evidence Mr Barnes for the Commissioners made the following points:

(1) The evidence of Mr Javid Akhtar on the question of dealings with Euro-tex can be seen as developing over time: as shown by the notes of Mr Phillips, the initial claim was that Mr Ahmed dealt with Euro-tex, and this was not denied when it was subsequently put in writing to the Appellant. But at the hearing the evidence is that Mr Ahmed transacted business with Euro-tex only five or six times, so that the great majority of the Euro-tex invoices relate to transactions involving Mr Javid Akhtar rather than his nephew.

(2) The business has been portrayed as a cash business, but the figures produced by Mr Thompson show that most suppliers were paid by cheque: only one other major supplier, Classy Fashions Limited, was paid in cash.

(3) Mr Thompson's analysis is undermined by the low figure taken as the wages of the business, and by his assumed opening cash balance: if adjustments were made to these amounts the results would indicate a negative cash balance in the business by the end of the period taken by Mr Thompson which would not be credible. The conclusions drawn by Mr Thompson from the figures should therefore be treated with great caution.

The findings in respect of the disputed facts

49. After careful consideration of the evidence we are satisfied that the Appellant has proved, to the standard of the balance of probability, that the business purchased the stock as itemised in the respective Euro-tex invoices on the dates shown on those invoices and that cash payment was made by the Appellant to Euro-tex for that stock in the invoiced amounts, including the amounts shown as in respect of VAT. Such cash payment was made either on delivery or at a later date. We therefore find these matters as fact in this appeal.
50. We found all the witnesses for the Appellant who gave evidence as to their involvement with Euro-tex to be credible, and we accept their evidence. They were not persons of wide education, but in giving their evidence and under cross-examination they spoke convincingly and with conviction. They acknowledged that after the lapse in time they had difficulty remembering detail, but they were certain in general terms of their respective dealings with Euro-tex or with Euro-tex stock during the relevant period, whether it was taking calls offering supplies, meeting up to make purchases and take deliveries and make cash payments in Manchester, taking delivery of stock at the Plymouth shop, or dealing with the stock when it was delivered. Thus, for example, Miss Lovelady gave a clear and credible account of the receipt of stock in Plymouth from Euro-tex and the labelling which she carried out, using the special code for Euro-tex to indicate the source of the clothing. She was uncertain under cross-examination whether she could actually have seen a van identified with the Euro-tex name on the side, but there was no doubt in her mind that goods had been delivered, unpacked, labelled and distributed into the New Touch retail outlets for sale and that those goods were supplied by Euro-tex. Similarly, Mr Ahmed gave a convincing account of his relationship with Mr Mohammad Yousaf of Euro-tex, of the introduction of Mr Yousaf to Mr Akhtar which he made at a trade fair, of the regular calls he thereafter received from Mr Yousaf offering to supply clothing for the shops, of the way, in consultation with his uncle, he made purchases in Manchester of stock, and of the way he obtained, at his uncle's request, what he took to be evidence of the VAT bona fides of Euro-tex. Finally, the evidence of Mr Javid Akhtar was credible in his explanation of a small retail business where suppliers constantly approach retailers seeking business, and where stock is delivered (either by the supplier or on collection by the retailer) against cash payment or the promise to pay cash, and all conducted on a basis of trust and relationships within the community (a trust which unfortunately was misplaced in this instance). We saw no reason to doubt this explanation or Mr Akhtar's evidence as to the dealings of the business through his nephew or himself with Euro-tex. In particular, we saw nothing to suggest that Mr Akhtar had in any way colluded with Mr Yousaf in producing false invoices bearing the Euro-tex name.
51. We take note of the point made by Mr Barnes that, as he put it, there was a picture developing over time as to who conducted business with Euro-tex, so that during the initial investigation the Commissioners were told by Mr Javid Akhtar that Mr Ahmed alone had dealt with Euro-tex, whereas the later evidence was that Mr Ahmed had been responsible for only eight at most purchases of stock. There is an inconsistency here. We note, however, that throughout Mr Ahmed remained the principal point of contact with Mr Yousaf: he introduced Mr Yousaf to Mr Akhtar; he had regular calls (at least once a week) from Mr Yousaf and spoke to his uncle about those calls; he occasionally met Mr Yousaf at cricket matches; and when Mr Akhtar was asked by Mr Phillips for evidence of the VAT status of Euro-tex (some months after New Touch had ceased to trade with Euro-tex), it was Mr Ahmed who took up the matter and obtained the copy Certificate of Registration. Whilst therefore Mr Ahmed may not have had the sole dealings with Euro-tex, it is reasonable to regard him as the main link and for Mr Akhtar to have emphasised this in his initial responses to questions from Mr Phillips as the picture unfolded (any caution during this investigation period was not only on the Appellant's part: the evidence of Mr Phillips is that he became aware in July of the de-registration of Euro-tex, but this was not explained to Mr Akhtar until the middle of September). In any event, we have to weigh in the balance any inconsistency there may be between things said at the time of the initial investigation and later evidence, and we have concluded that any such inconsistency does not in itself undermine the overall credibility of the evidence we heard.
52. We accept that in cash transactions such as those we were asked to accept between the Appellant and Euro-tex, where the parties are small businesses trading through connections made in the Asian community, there is likely to be the minimum of documentation in relation to the transactions. In this case a sales invoice, marked up in manuscript to show whether or not payment was made on delivery, was all that the parties required. The lack of further documentation should not therefore be regarded as a decisive factor which calls into question the existence of transactions which it is claimed are evidenced by the invoices.
53. It is the case that no witness was able to say in relation to any particular invoice: "This is my recollection of what happened in the case of the purchase for which this is the sales invoice". That is not surprising so long after the event, and if anything the caution of the witnesses in this regard supports the credibility of their evidence as to the matters to which they were prepared to testify. We do not consider that, in order to prove that the transactions took place, the Appellant has to adduce such specific evidence: the Euro-tex sales invoices themselves are evidence, and nothing we heard suggested that there were grounds on which they should be disregarded. The evidence was that, during the period early March 2002 to the end of May 2003, New Touch transacted a stream of business with Euro-tex and at its initiation, consistent with the invoices, and that, in our view, is sufficient.
54. In forming our view we also placed reliance on the evidence of Mr Thompson. He had carried out what might be called a forensic exercise investigating the accounts and records of the business. He was not, of course, able to show that specific cash payments had been made in settlement of specific Euro-tex invoices. What he was able to show was that, on certain assumptions, the business records were consistent with New Touch having purchased goods to the value of those shown in the Euro-tex invoices during the relevant period, and having sold those goods in the course of its business. He fairly posed the questions: "If the Appellant was not earning receipts from the sale of the Euro-tex stock, how can those receipts otherwise be accounted for?", and "If the Appellant was not paying cash for the purchase of the Euro-tex stock, how was that cash otherwise expended?".
55. Mr Barnes in his cross-examination, and Mr Phillips in his evidence, questioned some of Mr Thompson's assumptions (especially in relation to the assumed opening cash balance – although we noted Miss Lovelady's evidence as to the amount of the takings she collected in cash), and also some of the figures for cash expenditure (especially in relation to the wages bill). To us this seemed to be at the margin, and did not to any significant extent undermine the validity of the exercise carried out by Mr Thompson, or the conclusions which could reasonably be drawn from that exercise.
56. For these reasons we make the findings of fact as set out in paragraph 49 above.

The submissions of the parties on the questions of law

The submissions on behalf of the Appellant

57. Mr Mithani for the Appellant submitted first that the Appellant is entitled to recover as input tax the VAT charged on the two Euro-tex invoices dated prior to 3 April 2002, since at the time of those invoices Euro-tex was a registered person and therefore the supply made was a taxable supply. He argued that since the Appellant held a VAT invoice in those circumstances that in itself was sufficient to treat the VAT as input tax by the operation of section 24(6) VATA and regulation 29(2)(a) of the VAT Regulations 1995 – the Appellant, having produced a VAT invoice, cannot be further required to prove that the actual transactions took place. Self-evidently, he argued, if it is proved that the actual transactions did take place, then the Appellant holds a VAT invoice which is valid on any basis, so that his entitlement to recover the VAT as input tax is indisputable.
58. Mr Mithani's principal submissions concerned the remaining invoices issued by Euro-tex. In the case of those invoices, there was a taxable supply made by a taxable person in the course of his business within section 4(1) VATA, so that the amount charged (purportedly of VAT) was properly to be treated as input tax for the purposes of section 24(1)(a) VATA. This is the case, notwithstanding that at the time the supplies were made and the invoices issued Euro-tex was not registered for VAT: the supply made was taxable in its nature (not being an exempt supply), and it was made by a taxable person, defined in section 3(1) VATA as a person "…while he is, or is required to be, registered under this Act". The supplies made by Euro-tex to the Appellant alone whilst it was no longer registered were sufficient in themselves to require Euro-tex to be registered for VAT. Those supplies were made by Euro-tex in the course of its business of selling clothes. That an amount charged as VAT by a non-registered person who nevertheless is required to be registered should be treated as input tax is in accordance with the reasoning in the Ellen Garage case.
59. There is then the question of the evidencing of the input tax. Regulation 29(2)(a) of the VAT Regulations 1995 requires that the taxpayer must "hold the document which is required to be provided under regulation 13" in order to claim a deduction of input tax. That document is a VAT invoice complying with the provisions of regulation 14 of the VAT Regulations 1995 as to the matters it must contain. However, regulation 13 of the VAT Regulations 1995 is in terms of a VAT invoice provided by a "registered person" who makes a taxable supply to a taxable person. Since Euro-tex was not a registered person at the relevant time, regulation 13 cannot apply to Euro-tex, and so for the purposes of regulation 29(2)(a) there is no "document which is required to be provided under regulation 13". This being so, the necessity of holding a valid VAT invoice as required by regulation 29(2)(a) no longer applies, and provided that on the facts there is sufficient evidence of any kind that a taxable supply was made, that is sufficient to entitle the Appellant to recover as input tax the amount charged – there is no question of the Commissioners having a discretion: the entitlement of the taxpayer in the position of the Appellant (i.e. one who has received a supply from a taxable person who is not a registered person) is absolute as it is outside the scope of regulation 29(2) of the VAT Regulations 1995. This is the further line of reasoning applied in the Ellen Garage case, and the Appellant adopts that reasoning in the present appeal.
60. In the alternative, in Mr Mithani's submission, if the reasoning in the Ellen Garage case is not followed, the situation is one where the Commissioners have a discretion within the proviso to regulation 29(2) of the VAT Regulations 1995. In view of the evidence demonstrating that the supplies were made and paid for, the only proper exercise of that discretion is to allow the claim for input tax.

The submissions on behalf of the Commissioners

61. Mr Barnes, for the Commissioners, identified the issues for the Tribunal as being (i) whether the supplies to the Appellant were qualifying supplies of goods; (ii) if so, whether the invoices in relation to the supplies were valid; (iii) if not, whether the Commissioners should have, in their discretion, considered there to be sufficient other evidence of the charge to VAT.
62. The Appellant must show that there was a qualifying supply of goods. Even if the Appellant were to establish on the evidence that Euro-tex made the supplies as claimed, that, in principle, could not be a qualifying supply (in respect of all but the first two invoices) since Euro-tex was no longer registered and therefore could not charge VAT on its supplies, and there was no input tax which the Appellant could claim under section 24(1)(a) VATA. Mr Barnes referred to a number of VAT tribunal decisions: Direct Drilling, decision number 11071, dated 17 August 1993; Gohil & Company (Northampton Limited), decision number 18361, dated 24 October 2003; B & B Packaging, decision number 18792, dated 14 September 2004; and Platinum Clothing Limited, decision number 19144, dated 29 June 2005. If there is no qualifying supply of goods (and hence no input tax), no question of a discretion on the part of the Commissioners to allow a deduction for purported input VAT arises – the Commissioners do not have authority to permit a taxpayer to treat as input tax something which is not input tax (the suggestion in the VAT tribunal decision of Pride & Leisure Limited, decision number 6911, dated 1 October 1991 that there is a discretion in such a case is incorrect).
63. The Commissioners accepted that the Ellen Garage case is authority for the proposition that, even where supplies were not made by a registered person, if the evidence demonstrated that supplies were made in a sum that would have made the supplier liable to be registered, there was then a taxable supply by a taxable person in respect of which anything charged as VAT would properly be input tax and could (in principle) be claimed as such. However, the Ellen Garage case can be distinguished from the Appellant's case: in the Ellen Garage case the supplier had never been registered (but was potentially registerable), whereas in the Appellant's case the supplier had been registered and then his registration had been cancelled on the basis that he was a missing trader, and as such was not potentially registerable.
64. If, contrary to the submissions of the Commissioners, there were supplies made by Euro-tex, and they were taxable supplies made by a taxable (albeit unregistered) person (i.e. applying the Ellen Garage principle), input tax can be claimed only if the VAT is evidenced as the relevant regulations provide, or as the Commissioners otherwise permit: section 24(6)(a) VATA. Mr Barnes explained that this requirement of evidence in a specific form (in effect, a valid VAT invoice, which is the broad effect of regulation 29(2) of the VAT Regulations 1995) is consistent with the approach embodied in the Sixth Directive, which places the onus on businesses to manage themselves (and their paperwork) so as to enable the VAT system to function.
65. The effect of regulation 29(2) is clear where there the taxpayer is in receipt of a taxable supply by a taxable person, and that person is also registered – to claim the input tax the taxpayer must produce a valid tax invoice (i.e. the invoice which the registered person is obliged to provide under regulation 13, and which, to be valid, must meet the requirements of regulation 14). If such a taxpayer cannot produce such a valid tax invoice, the proviso to regulation 29(2) gives the Commissioners a discretion to accept other evidence of the charge to VAT.
66. Where the taxpayer is in receipt of a taxable supply by a taxable person, and that person is not registered, then of course there can be no question of a valid tax invoice, and the situation is not expressly provided for in regulation 29(2). Accordingly the taxpayer in this situation cannot as of right claim input tax since there is no specified document or other evidence that he can produce as the validation of his claim. Accordingly, and however compelling the evidence may be, the claim falls solely to be determined by the Commissioners applying the discretion which they have by virtue of the proviso to regulation 29(2). The Ellen Garage case which goes on to hold that in such a situation the taxpayer has the right to claim the input tax provided that he proves that the supplies were made by a taxable person is wrongly decided in this respect, since there is no statutory basis for that conclusion.
67. Mr Barnes made his final submissions in relation to the discretionary powers of the Commissioners granted by the proviso to regulation 29(2) of the VAT Regulations 1995. He referred first to Reisdorf v Finanzamt Köln-West (Case C-85/95) [1997] STC 180 where (at paragraph 29, at p 193) it is confirmed by the European Court that the Sixth Directive gives member states the power to determine the rules as to the manner in which taxable persons are to establish the right to deduct input tax, including rules requiring the production of tax invoices and, in default, rules allowing the taxpayer to produce other cogent evidence that the relevant transaction actually took place. The discretionary powers of the Commissioners are in accordance with such powers.
68. Next he referred to Kohanzad v Customs and Excise Commissioners [1994] STC 967, which confirms that the tribunal has a supervisory jurisdiction only in respect of the discretion which the Commissioners have by virtue of the regulation 29 of the VAT Regulations 1995. Thus the tribunal can set aside the decision taken by the Commissioners in their exercise of that discretion only if that decision is unreasonable on "Wednesbury" principles, that is, a decision which no commissioners acting reasonably could have taken because the decision is fundamentally flawed, as where they have failed to take into account a relevant matter or taken into account a matter which is not relevant in reaching that decision. Mr Barnes also referred to the tribunal decision in the case of Elite Designs International Ltd, decision number 16925 dated 7 November 2000 relating to the exercise of the Commissioners' discretionary power under regulation 29.
69. Mr Barnes expressly conceded that, in exercising that supervisory jurisdiction in this case, the tribunal should take account of the evidence available to the Commissioners, and the state of affairs known to them, as at the time of the hearing of the appeal, and not as at the time they took the decision in June 2004 to refuse the Appellant's claim to recover the input tax. The Commissioners' case, even on the basis so conceded, was that even if the Appellant could produce cogent evidence proving that the supplies took place, the Commissioners' refusal to exercise their discretion in favour of the Appellant was reasonable in view of the failure of the Appellant to keep proper records of the relevant transactions (including details of his supplier) such as would have enabled him to comply with his VAT responsibilities.

Decision

The initial two invoices

70. We deal first with the two invoices issued by Euro-tex before Mr Mohammad Yousaf trading as Euro-tex was de-registered for VAT purposes by the Commissioners on 3 April 2002. These invoices are dated 10 March 2002 and 29 March 2002 respectively. The invoice dated 10 March 2002 is for goods to the value of £14,800, and VAT of £2,590 was charged. The invoice dated 29 March 2002 is for goods to the value of £9,620, and VAT of £1,683.50 was charged. We have found that supplies as detailed in these invoices were made. At the time such supplies were made the supplier was a taxable person and was registered for VAT. The supplies were taxable supplies made by a taxable person, so that VAT properly fell to be charged on those supplies within section 4 VATA. For the Appellant, that VAT is input tax within section 24 VATA in principle. The invoices are VAT invoices provided by a registered person within regulation 13 of the VAT Regulations 1995 and satisfying the requirements, as to content, of regulation 14. Accordingly, at the time of claiming the deduction of input tax the Appellant held a valid VAT invoice within regulation 29(2)(a) of the VAT Regulations 1995. Therefore, with respect to these two invoices, the Appellant has met all the requirements he needs to satisfy in order to be entitled to deduct the VAT as input tax, and accordingly we allow his appeal with respect to that VAT, totalling £4,273.50. It follows that we allow his appeal against the assessment for interest to the extent that such interest relates to the VAT which he is entitled to deduct as input tax.
71. We should mention that Mr Mithani argued that the production by the Appellant of these two invoices was in itself sufficient to entitle the Appellant to deduct the VAT in question as input tax under regulation 29 of the VAT Regulations 1995, and that the Commissioners could not look beyond the invoices to require the taxpayer to provide additional evidence that the supplies in question took place. In the light of our findings of fact this point falls away, but we mention that we do not agree with Mr Mithani's point. The requirements of regulation 29(2) are a necessary condition which the taxpayer must meet, but are not a sufficient condition: he must produce a VAT invoice as evidence of the tax paid, but we cannot see that the terms of section 24 VATA or regulation 29 go the further step to entitle him as of right to the deduction if the VAT invoice is produced.

The remaining invoices – Euro-tex a "taxable person"

72. The position is more complex with respect to the remaining invoices, being those issued by Euro-tex after its registration was cancelled. We have found that the supplies to which those invoices relate were in fact made by Euro-tex. The first question is whether they were taxable supplies made by a taxable person in the course or furtherance of a business carried on by him, so that VAT was properly charged on them within section 4 VATA. The supplies were not exempt, and therefore were taxable. It is not in dispute that, if they were made, they were made by Euro-tex in the course or furtherance of a business carried on by Euro-tex. The question in dispute is whether Euro-tex, who was not then registered for VAT purposes, was nevertheless at that time a "taxable person", that is, a person who was at that time required to be registered for VAT purposes: see section 3(1) VATA.
73. It is our decision that Euro-tex was a "taxable person" with respect to the supplies made on or after 3 April 2002, and that in consequence those supplies were taxable supplies made by a taxable person in the course of a business carried on by him, and that VAT was charged on those supplies. Clearly the value of supplies made by Euro-tex to the Appellant alone was in excess of the VAT registration threshold (and we note that it is apparent from the numbering of the Euro-tex invoices that Euro-tex was issuing invoices to other suppliers during the period it traded with the Appellant). Euro-tex was therefore a person who was required to be registered for VAT purposes, and thus a taxable person within section 3 VATA.
74. In this respect we follow the decision in the Ellen Garage case. In that case the supplier had never been registered for VAT, but made supplies to the appellant for value in excess of the VAT registration threshold. In the present appeal the supplier had been registered for VAT with effect from 1 December 2000 (the Certificate of Registration was issued on 29 October 2001), but the registration was cancelled by the Commissioners on the grounds that the proprietor was, in the language of Mr Phillips, a "missing trader" – this term was not explained further to us, but we assume that it meant that the Commissioners could no longer contact or trace him, and presumably he was in default with his VAT compliance and payment obligations. Mr Barnes argued that this distinguished the Appellant's case from that of the appellant in the Ellen Garage case. But we cannot see that it is a material distinction. In particular, it was not shown to us that once a trader is de-registered, he is necessarily precluded from being a person who is required to be registered if in fact (as here) he continues to make supplies of a substantial value. Mr Barnes referred us to the tribunal decisions in the cases of Platinum Clothing Limited, B & B Packaging, and Pride & Leisure Limited, but in each of those cases the suppliers were corporate entities which at the relevant time had ceased to exist (it is true, that in B & B Packaging the supplier had first been de-registered, but the supply in question was made after the supplier had been dissolved). Mr Mohammad Yousaf had not ceased to exist, and he had not ceased to trade as Euro-tex. There may be an issue as to whether it was right for the Commissioners to cancel his registration, but even if it were, if in fact he was subsequently making taxable supplies to a value exceeding the registration threshold, it seems to us that he was liable to be registered. Mr Barnes also referred us to the tribunal decision in the case of Direct Drilling, which is dated 17 August 1993 (and was therefore heard before the Ellen Garage case): this was a case of an invoice rendered by a supplier after the supplier had been de-registered, but the value of the supply made to the appellant was £8,000, and there was no other evidence that the supplier was making supplies to the value which exceeded the then registration threshold. We therefore do not consider that the decision in the Direct Drilling case is relevant to the Appellant's appeal.

The remaining invoices – no entitlement as of right to claim input tax

75. This brings us to the question of the entitlement of the Appellant to deduct the input tax charged to him by Euro-tex, and in particular the application of regulation 29(2) of the VAT Regulations 1995 in circumstances where there is a taxable supply by a taxable person, but that person is not registered. On this point we accept the arguments of the Commissioners, and decide that the effect of section 24(6)(a) VATA and regulation 29(2) is to give the Commissioners a discretion in these circumstances as to the evidence they require that the VAT has been charged.
76. The parties agree, as do we, that regulation 29(2)(a) of the VAT Regulations is not in point in the situation where the supplier is not registered, since the taxpayer cannot "…hold the document which is required to be provided under regulation 13" (i.e. a VAT invoice issued by a supplier who is a registered person, being an invoice which satisfies the requirements as to content of regulation 14). Further, it is not surprising that there is no express stipulation in regulation 29 dealing with the position where the taxable person is not registered – by its nature that is a very unusual circumstance which probably arises only where the actions of the supplier are, or are tantamount to, fraudulent. But it seems to us too large a step to say, as the Appellant says, that because there is no express stipulation as to the evidence he must produce as to the VAT charged, he must be entitled to claim a deduction for input tax once he shows the supply has been made. That would be inconsistent with the overall scheme under which taxpayers are permitted to claim a deduction for input tax. That scheme, as it appears from section 24(6) VATA and regulation 29(2), is to permit VAT to be treated as input tax only to the extent that the charge to VAT is evidenced by reference to specified documents or specified other evidence, or by such other evidence as the Commissioners direct. There is no scope within the legislation for anything else, that is, for the taxpayer to claim input tax on some other basis or evidence.
77. Since regulation 29(2) does not specify a document or other specific evidence in the case of a supply from a person who is taxable but not registered, that situation must be regarded as falling within the proviso to regulation 29(2), so that the taxpayer, in order to claim the deduction, must hold or provide such other evidence of the charge to VAT as the Commissioners may direct – thus the matter is within their discretion. This is an outcome which entirely accords with common sense: given the unusual circumstances of VAT charged by taxable but unregistered persons, it would seem strange if the legislation did not preserve for the Commissioners the right to specify the evidence they required of the charge to VAT but instead gave the taxpayer the right to claim the deduction if he showed the supply was in fact made. That would put such a taxpayer in a better position than his counterpart who has received a supply from a taxable person who is registered, and who must satisfy a specific evidential requirement (holding a valid VAT invoice) or rely on the Commissioners' discretion (and so could not as of right claim the deduction simply by showing that the supply was in fact made).
78. The Appellant relied on the tribunal decision in the Ellen Garage case for support in his contention that, if he shows the supply was made by an unregistered taxable person, he is entitled as of right to a deduction as input tax of the VAT charged. It seems, however, that the tribunal accepted in that case that the proviso to what is now regulation 29(2) of the VAT Regulations 1995 (and which we note is in an amended form to the provision before that tribunal) applies in the case of supplies made by unregistered taxable persons. The concern of the tribunal was that no direction, either generally, or by particular reference to the appellant taxpayer, had been made by the Commissioners as to the evidence of the charge to VAT, and that led to the conclusion that the appellant should be entitled to deduct the input tax, having established that the supplies had in fact been made. The absence of any direction in relation to the appellant taxpayer as identified in the Ellen Garage case may simply have been a question of the evidence (or lack of it) before the tribunal, or it may have been a misunderstanding of the nature of the proviso, that is, a failure to see it as conferring a discretion on the Commissioners as to whether to allow credit for input tax when the evidence specified in the regulations is not available: that the proviso confers such a discretion is clear from the Kohanzad case (which was decided after the Ellen Garage case). (The Kohanzad case refers to the discretion by reading together what is now regulation 29(1) with regulation 29(2)(a) of the VAT Regulations 1995, rather than the proviso to regulation 29(2), but the language is materially the same.)
79. In the present appeal there was evidence that the Commissioners (in the person of Mr Phillips) had called for specific evidence of the supplies and charge to VAT – in that sense had, in the language of the proviso to regulation 29(2), directed such other evidence as the Appellant should hold in order to make his claim for input tax: he states in his evidence: "I advised [Mr Javid Akhtar] that the Euro-tex invoices were reflecting an invalid VAT number and that I would need alternative commercial evidence before I could allow the input tax claimed on the 05/03 return. I referred to delivery notes, proof of payment, or correspondence." These requirements were repeated in correspondence from Mr Phillips to the Appellant in September 2003 and June 2004. That is enough, in our view, to distinguish the Appellant's case from that of the appellant taxpayer in the Ellen Garage case. But we would make one further comment: as mentioned, in the Ellen Garage case the tribunal concluded that in the absence of any direction as to alternative evidence, the taxpayer in these circumstances succeeded in his claim for a deduction for input tax if he established that the supply was made – that is, so to speak, the default position. For the reasons given above, we do not think the scheme of the legislation permits that view – or, as Mr Barnes put it, there is no legislative path which leads to that result. The only way in which a taxpayer can claim a deduction for input tax is to satisfy specific evidential requirements which have built in to them a measure of discretion conferred on the Commissioners – there is no express or implied default position. In that respect we would not follow the tribunal's decision in the Ellen Garage case.

The remaining invoices – the Commissioners' discretion

80. This brings us to the final question, namely whether the Commissioners acted so unreasonably in the exercise of the discretion conferred on them as to the evidence they required as to the charge to VAT that, in exercise of our supervisory jurisdiction, we should set aside their decision not to allow the Appellant to claim a deduction for the input tax paid on the Euro-tex invoices. We cannot conclude that the Commissioners acted so unreasonably, and therefore we must let stand their decision and the consequent assessment made on the Appellant as it relates to the supplies made after Euro-tex ceased to be registered for VAT purposes, and the related interest charge. To that extent we dismiss the Appellant's appeal.
81. As mentioned, Mr Barnes told us that the position of the Commissioners, at least in relation to this appeal, is that we must view their decision in the light of the matters as they appeared at the time of the hearing, and not simply in the light of circumstances or their knowledge at the time they took the decision to refuse the claim for input tax in June 2004: he said that the refusal of the Commissioners to allow the claim should be viewed as a continuing state of affairs, so that they had continued in their refusal notwithstanding matters and evidence brought to their attention as at the time of the hearing. We see the sense of the point, but note that in the Kohanzad case Schiemann J says (at p 969e): "…it has recently been decided that the supervisory jurisdiction is to be exercised in relation to materials which were before the commissioners, rather than in relation to later material." What is clear in the present case is that although the original decision was made before Mr Phillips had before him much of the evidence which we had before us at the hearing (the evidence of the witnesses other than Mr Javid Akhtar, including the evidence of Mr Thompson), the substance of that evidence was available to the Commissioners before the hearing (in the form of witness statements, and Mr Thompson's analysis) and the Commissioners did not as a result change their decision. Under cross-examination at the hearing Mr Phillips confirmed that he saw no grounds to change his decision in view of the Appellant's evidence as presented at the hearing.
82. As is made clear in the Kohanzad case, the jurisdiction of the tribunal in relation to the exercise by the Commissioners of their discretion in circumstances such as these is a supervisory jurisdiction only: we cannot substitute our own decision for that of the Commissioners simply because we would have reached a different decision. We can set aside the Commissioners' decision if we conclude that no body of Commissioners, acting reasonably, could have reached that decision.
83. It is also clear that, simply because we have found that the Appellant has proved his case that the supplies in question were made to him by Euro-tex, that in itself cannot be a ground for setting aside the Commissioners' decision – that would be to disregard, or render meaningless, the discretion which the Commissioners have: it would lead us back to the analysis we have already rejected, namely, that if a person in the position of the Appellant proves that the supplies were made, that as of right entitles him to claim the input tax.
84. The discretion relates to the evidence which the Commissioners require to substantiate the supplies and the charge to VAT. In this particular case the Commissioners asked for alternative commercial evidence (perhaps one might say additional commercial evidence, additional, that is, to the invoices themselves). Mr Phillips referred to delivery notes, proof of payment or correspondence. He wanted documentary evidence to support the invoices once he knew that the invoices were possibly suspect, issued as they were by a trader who could no longer be traced by the Commissioners. The Appellant was not able to produce such evidence. He eventually produced witnesses who recalled in fairly general terms dealings with Euro-tex over the relevant period, and he produced the evidence of Mr Thompson which showed that transactions corresponding to those with Euro-tex were probable, given the turnover of the business and the cash and bank records of the business. There is an obvious difficulty in the case of cash transactions in producing records of those transactions. Nevertheless, Euro-tex was, for the period March 2002 to the end of May 2003, a very substantial supplier to the Appellant's business, and although the Appellant had no reason to doubt the validity of the VAT invoices produced by Euro-tex, he cannot be entirely surprised if the Commissioners require some corroborative documents or other similar evidence of the specific transactions entered into between Euro-tex and the Appellant.
85. We therefore do not consider that the Commissioners acted unreasonably. The aim of Mr Phillips was to have tangible evidence of the relevant transactions over and above the suspect invoices, or at least such evidence of the business relationship between the Appellant and the supplier as would substantiate the claims that the supplies in question were made. We cannot see that in his aim or in his actions in pursuit of that aim he was misguided or his judgment was at fault. The type of evidence he requested was consistent with the type of evidence specified in regulation 29(2) of the VAT Regulations 1995. His requirement was reasonable. The relevant legislation gave him the discretion as to the evidence he required to substantiate the charge to VAT, and he exercised that discretion reasonably in the circumstances of this particular case.
86. In conclusion we would say that we have a great deal of sympathy with the Appellant in the position he has found himself in. As Mr Mithani pointed out, when the Appellant began trading with Euro-tex, Euro-tex was a registered trader, and the Appellant had no way of discovering, under the procedures then in place, that his registration had subsequently been cancelled (although there was no evidence, we have to say, that the Appellant checked out the VAT status of his supplier at any point, until Mr Phillips raised the issue after trading with Euro-tex had ceased). The Appellant was duped by Euro-tex, which has profited at the Appellant's expense. The Commissioners have failed to collect from Euro-tex the VAT it charged to the Appellant, but they, on the evidence of Mr Thompson, have collected the VAT which the Appellant charged on the sale of the clothing purchased from Euro-tex. The outcome for the Appellant would have been different if he had maintained better business records, or acted with more care and circumspection in his dealings with his cash suppliers. As it is, his position in law is as we have set out above, and we are required to reach our decision accordingly.

Costs

87. At the hearing Mr Barnes agreed that if we found entirely for the Appellant then he would accept that the Appellant's reasonable costs should be awarded against the Commissioners. He said that if we allowed the Appellant's appeal in part (i.e. in relation to the initial two invoices) then the Commissioners would not seek their costs against the Appellant, but the Commissioners would reserve their right to apply to the tribunal to deal with the quantum of any costs awarded against the Commissioners.
88. Accordingly, since we have allowed the Appellant's appeal in part, we make no order now as to costs, but either party is at liberty to apply to the tribunal for an order as to costs, such application to be made no later than thirty days after the date of the release of this decision. In case it might be helpful to the parties in reaching an agreement as to costs without resort to the tribunal, we should perhaps make it clear that, were we required to make an order as to costs, we would be mindful that by far the greater part of the hearing (and, no doubt, the greater part of preparing the Appellant's case) was taken up with the Appellant having to prove that the supplies in question had been made by Euro-tex, which, given the stance of the Commissioners, he was required to do in order to claim as a deduction the input tax which we have allowed.

EDWARD SADLER

CHAIRMAN

RELEASE DATE:24 April 2007

LON/2004/1840