19049
	VAT — INPUT TAX — evidence for claim — whether tax incurred on supply for the purpose of a business — VAT paid in respect of introductory payment for licence to run post office held not to be deductible in respect of general stores business carried on at same address — appeal against assessment to recover tax dismissed

	VAT — CONSIDERATION — vouchers — commission payable on telephone cards (face-value vouchers) pre-Finance Act 2003 — whether output tax due — appeal against assessments allowed by consent

	VAT — PENALTIES — misdeclaration— conduct in deducting input tax reasonable — appeal against penalty assessment allowed

MANCHESTER TRIBUNAL CENTRE

MR DILIP & MRS SANTOK MAYARIYA
 	trading as “OAKTREE LANE (SELLY OAK)
	POST OFFICE & STORES”	Appellants

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	Michael Johnson (Chairman)
						Marjorie Kostick BA FCA CTA 	
				
Sitting in public in Birmingham on 16 March 2005

Ashwin Kagdadia, chartered accountant, for the Appellants 

Lisa Linklater, counsel, instructed by the Solicitor’s office of HM Customs and Excise for the Respondents 

	© CROWN COPYRIGHT 2005

DECISION

1.	Between 14 September 2000 and 6 December 2003 the Appellants Mr and Mrs Mayariya were registered for VAT in respect of their partnership business carried on at 8 Oaktree Lane, Selly Oak, Birmingham 29 under the style “Oaktree Lane Post Office and Stores”.

2.	When the Appellants acquired their business in the year 2000, Mrs Mayariya became the postmistress.  The Central Processing Unit of Post Office Counters Ltd sent her an invoice (“the invoice”) dated 22 August 2000 for the introductory payment due from her in that capacity by way of licence fee.  The invoice was for £11,854.26, plus VAT of £2,074.50, a total of £13,928.76.

3.	The Appellants paid the invoice and treated the VAT paid as an input deductible from the output tax payable by them in respect of their business for their accounting period 11/00.  

4.	Amongst the items sold by the Appellants were telephone cards.   The sales of telephone cards with which the tribunal is concerned were made during the Appellants’ VAT accounting periods 05/02, 08/02 and 11/02 respectively.  The Appellants did not account for output tax in respect of these sales.  

5.	The Commissioners of Customs and Excise (“Customs”) have disallowed the input tax deduction in respect of the VAT evidenced by the invoice.  On 3 December 2003 they notified the Appellants of assessments (“the assessments”) calculated on 28 November 2003.  The assessments were firstly for the amount of the input tax deducted and secondly for £51.00 output tax said to be due in respect of the sales of telephone cards mentioned, a total of £2,125.00, to which interest of £414.53 was added.   The assessments were made pursuant to section 73(1) of the Value Added Tax Act 1994.

6.	Customs have also assessed a misdeclaration penalty of £311.00 (“the penalty assessment”) in respect of the input tax said to have been wrongly deducted.  That assessment was made pursuant to section 63 of the Value Added Tax Act 1994 and was notified on 10 December 2003.  

7.	The Appellants are appealing against the assessments and the penalty assessment on the following grounds:

a)	The VAT payable in respect of the invoice was properly deductible as an input attributable to their business carried on at 8 Oaktree Lane;

b)	The penalty assessment was therefore misconceived;

c)	The sales of the telephone cards were not taxable supplies.

8.	In answer to these points, Customs say as follows:

a)	The status of the postmistress Mrs Mayariya vis-à-vis the Post Office was that of employee, so that the invoice was unconnected with the partnership business;

b)	The Appellants’ conduct justified the penalty assessment;

c)	The telephone cards were “face-value vouchers” as described in Customs’ VAT Information Sheet 12/03 of August 2003.  Customs accept that the new rules referred to in that publication have only taken effect since the sales of the cards with which the assessments are concerned, but maintain that VAT was due on the commission received in respect of the supplies of the telephone cards.

9.	We heard oral evidence from one witness, namely the Appellant Mr Dilip Mayariya.  We find the following facts.

10.	The Appellants acquired the business at 8 Oaktree Lane as a going concern.  Their first day of business was Thursday, 14 September 2000.  Some time before this, in Summer 2000, they attended for interview in respect of the role of postmaster/mistress at that address.  Post Office Counters Ltd decided to offer Mrs Mayariya the position of postmistress.  The Appellants received an explanation of what was involved in that function and were each given some training, on the footing that Mr Mayariya would assist his wife.  

11.	In order for the appointment of Mrs Mayariya as postmistress to take place, the previous postmaster had first to write a letter of resignation, which he did, and the appointment of his successor then took place after three months.  The Appellants were notified by letter from Post Office Counters Ltd that they were authorised to carry on the post office activities at 8 Oaktree Lane.  The letter contained a written contract, but the tribunal was not shown either the original or a copy of the contract, nor of the letter.

12.	The Appellants received payment for the post office activities at 8 Oaktree Lane.  The amounts received fluctuated, depending upon the volume of transactions.  As Mr Mayariya put it to us, “The more we sold, the more profit we got”.  Value added tax was not paid in respect of these payments.
13.	Mr Mayariya was adamant that the post office and the general stores “went together”.  He told us, and we accept, that he and his wife would not have bought one without the other.  When they came to prepare business accounts the two activities were combined for that purpose.  The net profits or losses, divisible between them in equal shares as partners, reflected all the transactions at the premises, both post office transactions and those relating to the general stores.  This appears to be confirmed by the accounts which were put before us.

14.	In 2002 the Appellants put in a manager to run the business and ceased to run it themselves.  The manager paid the Appellants a rent for the business.  Post Office Counters Ltd knew about and was content with that arrangement.   However the accounts show that the business became loss-making.  On 6 December 2003 the Appellants sold the business.   The final set of accounts is made up till then.

15.	The business sold telephone cards as detailed in the assessments.  VAT was not paid in respect of the cards.  The Appellants had no information that they should do so.  They were informed about VAT in respect of the cards in consequence of a routine assurance visit made to their premises on 25 June 2003 by an officer of Customs, Miss Carolynn Patricia Anderson.  On that occasion Miss Anderson picked up the position regarding both the telephone cards and the input tax deducted in respect of the invoice.   

16.	We have read and taken account of Miss Anderson’s witness statement dated 29 September 2004 before the tribunal.  She is the assessing officer in respect of the assessments.  We record that she was in attendance at tribunal and willing to give oral evidence if required, but she was not asked to offer herself for cross-examination.

17.	Each of the parties put documents before the tribunal.  The Appellants handed in Alphyra UK self-billing invoices indicating that VAT had not been considered in respect of the supplies of telephone cards.   We were provided with copies of the Appellants’ accounts as mentioned, and with a copy of the invoice dated 22 August 2000.   The parties each copied to us the correspondence between the parties, and VAT Information Sheet 12/03, and Customs provided us with an extract from Notice 700.

18.	We did not, unfortunately, receive copies of any documentation dealing with the relationship between Post Office Counters Ltd and the Appellants.  

19.	In that regard, Miss Linklater, appearing for Customs, referred us to H & V Patel v Commissioners of Customs and Excise (1997) VAT Decision 14956, a decision of Mr Miller sitting in London, and Mr Kagdadia, appearing for the Appellants, referred us to Patel & Anor (No 2) [1998] BVC 2129, which was the same case, restored for a further ruling by the chairman.  

20.	The decision in Patel (No 1) quotes at considerable length from the documentation governing the obligations of the postmaster, showing that the contractual terms and rules applicable in that case were very detailed.  Following a lengthy and careful review of the documentation, and after taking into account a range of considerations, Mr Miller concluded that Mr Patel was employed by Post Office Counters Ltd under a contract of service.  Accordingly the VAT paid by him in respect of the introductory payment equivalent to that paid by the Appellants in the present case could not be offset against tax paid in respect of supplies made by him.

21.	In the absence of evidence to the contrary, it seems to us, from the facts that we have found in this case, that there existed contractual documentation governing the relationship between the Appellant Mrs Mayariya and Post Office Counters Ltd containing terms from which we might well have concluded that she was an employee of Post Office Counters Ltd.  Indeed, we do not see why her position should not, as a matter of mixed fact and law, and in the absence of such further evidence, have equated to that of Mr Patel in his case.  In this appeal, the burden of proof has rested upon the Appellants to demonstrate the contrary – which is a burden that the Appellants have not discharged.

22.	In respect of the input tax issue, Miss Linklater submitted that, in the light of Patel (No 1), this tribunal could not properly treat the invoice as paid on behalf of the business registered for VAT.  Mr Kagdadia submitted that it was unfair, having regard to the way in which the Appellants had carried on their business, which was an entity both from a trading and an accounting point of view, to deprive them of the benefit of the input tax reclaim.  

23.	With regard to this issue, we find the decision in Patel (No 2) to be particularly helpful.  That decision is a model of lucidity, as one would expect from Mr Miller.  Whilst the legal position is technical, it must be well capable of being understood by Mr Kagdadia, and open to explanation by him to his clients.  

24.	What Mr Miller says in his decision in Patel (No 2) – and we respectfully entirely agree with him – is that, in order for input tax to be reclaimed in respect of a business, the supplies in respect of which the tax has been charged must relate to the taxable business.  There exists an argument, which the decision discusses, that the post office activity is so wrapped up with the general stores activity that the payment of the introductory fee to Post Office Counters Ltd must, at least in part, have been for the benefit of the business registered for VAT, even if, as a matter of fact, the postmaster’s relationship with Post Office Counters Ltd was that of an employee.  

25.	Mr Miller dealt with this as follows (in paragraphs 9 and 10 of his decision) –  

	“The real difficulty facing the appellants in my judgment is the way supplies have to be attributed to taxable and other activities.  Input tax is deductible if the supplies upon which the VAT has been charged are used or to be used in making taxable supplies, not for activities which are outside the scope of VAT … Thus although the acquisition of the subpostmastership actually benefited the retail activity and the partners’ expenditure on obtaining the opportunity to run the sub-post office had, in part, as a further object the obtaining of that benefit to the retail business, that does not make a part of the VAT on that expenditure deductible as input tax”.

26.	That seems to us precisely to cover the ground in the present appeal as regards the input tax issue.  Because we are not persuaded that the factual position in the present appeal is any different from that found in Patel (No 1), nor that the legal position is any different from that so well expressed in the decision in Patel (No 2), we accept the submissions of Miss Linklater on this issue and reject those of Mr Kagdadia.  

27.	We accordingly turn to the lesser issue, relating to the telephone cards.  It is common ground that the tax treatment in practice adopted at the time the cards in issue in this appeal were sold was different to the current practice.  Under the old practice, VAT was only accounted for when face-value vouchers – which is what telephone cards are – might be redeemed.  In that case, the person liable for tax would be the redeemer.

28.	The legislation relating to face-value vouchers – section 51B and Schedule 10A of the Value Added Tax Act 1994 – was enacted by the Finance Act 2003 and took effect for supplies of vouchers issued after 8 April 2003.  Accordingly it does not cover any of the telephone cards in issue in this appeal.

29.	Customs’ position is that the telephone cards were sold by the Appellants as agents, and that the commission payable to agents has always been taxable.  The Alphyra UK self-billing invoices before the tribunal show that commission was receivable in respect of the telephone cards provided to the Appellants for sale.

30.	The commission so shown however appears to us to be no more than part of the consideration for the cards themselves.  It is not evidence of an agency relationship between Alphyra UK and the Appellants.  There is no evidence before us of any such relationship.  

31.	We record that Customs is anxious to maintain the principle that, under the old practice, commissions received from suppliers relating to the sale of telephone cards were taxable.  Miss Linklater however informed us that Customs were content to “drop” such of the assessments in this appeal as relate to tax in respect of the telephone cards.   She spoke of Customs withdrawing those assessments, but they are of course now before us for the purposes of this appeal, so we should deal with them in this decision.  Having regard to the small amount of tax in issue in those assessments, it seems to us to be a sensible course that Customs do not now wish to pursue the recovery of that tax.

32.	We turn finally to the penalty assessment.  Section 63(10)(a) of the Value Added Tax Act 1994 provides that conduct falling within section 63(1) of that Act, under which the penalty arises, shall not give rise to a penalty under that section if the person concerned satisfies Customs or, on appeal, a tribunal that there is a reasonable excuse for the conduct.

33.	The conduct in question dates back to the Appellants’ period 11/00, when they reclaimed input tax in respect of the invoice.  We have asked ourselves whether their action in reclaiming the tax was reasonable, in the matrix of circumstances whereunder they were acquiring a package, namely a post office and general stores business, carried on at 8 Oaktree Lane.  We have concluded that their action was reasonable.  In our view, they should not therefore be liable to the penalty.

34.	We therefore decide as follows –

1)	The input tax was not properly reclaimed, and the assessment for additional output tax in respect of period 11/02 is therefore upheld together with interest;

2)	By consent, the appeal in relation to the assessments in respect of periods 05/02, 08/02 and 11/02 respectively should be allowed, so that those assessments fall to be discharged;

3)	The Appellants should not be liable to the penalty assessment, which accordingly also falls to be discharged.

35.	The end result is that this appeal is therefore allowed in part.  That being so, and acknowledging that we were strongly pressed by Miss Linklater to award costs to Customs should they succeed on the main issue, as they have, we think that the appeal was justified.  It has resulted favourably to the Appellants not only with regard to the lesser issue of the telephone cards, but, more importantly, also as regards the issue of the penalty.  We have decided that the position of the Appellants with regard to the input tax issue was reasonable, although wrong.  In view of these considerations, we decide that justice is best served and the balance properly held between the parties by making no order with regard to the costs of this appeal.

MICHAEL JOHNSON
CHAIRMAN
Release Date: 18 April 2005

MAN/04/0190