The case concerned payments made by the appellant to a supplier who purported to charge him VAT when the supplier was not registered for VAT. The principal issues for the tribunal were firstly, whether the appellant had an entitlement to claim as input tax the purported VAT paid and secondly, whether, if he had no such entitlement, the commissioners had a discretion to allow him to claim the amount and had reasonably exercised that discretion.

The appellant was a retailer of fashion clothing and accessories from various premises in the West Country. One of the appellant's suppliers operated under the name Euro-tex. Euro-tex had been registered for VAT, but its registration was cancelled by the commissioners in April 2002 when the proprietor was classified as a missing trader. The appellant held 45 invoices from Euro-tex dated between March 2002 and May 2003, all but two of which were dated after cancellation of the registration. The invoices bore all the required details of a VAT invoice and showed an amount of VAT charged. The commissioners brought to the appellant's attention the fact that at the time the invoices were issued, Euro-tex was no longer VAT- registered. An assessment was issued in the sum of £72,951, plus interest, to disallow input tax deducted by the appellant.

The appellant stated that he had entered into transactions with Euro-tex in good faith and had received proper VAT invoices as evidence of the supplies made. To disregard the invoices was to conclude that they were fictitious and that the appellant was party to a fraud, but there was no evidence of fraud against the appellant. The commissioners challenged the appellant's claim that the alleged supplies had taken place. They pointed out that the evidence to support a commercial relationship between the appellant and Euro-tex was sparse. Even though the alleged supplies were supposedly paid for in cash, there was a noticeable absence of documents, such as delivery notes, correspondence and basic contact information about Euro-tex. Further, although the appellant's business was portrayed as a cash business, only Euro-tex and one other supplier were actually said to have been paid in cash.

The appellant submitted that he was entitled to reclaim the VAT charged on the two invoices dated before Euro-tex's registration was cancelled. Having produced a VAT invoice, the appellant maintained that he was not required to prove that the transactions actually took place. However, if it was proved that the transactions did take place, then entitlement to deduct input tax in respect of those two supplies was indisputable. The appellant's principal submissions related to the invoices dated after the supplier's registration was cancelled. In the appellant's view, he had a right to deduct input tax because the supplier was a ‘taxable person’. This was defined in s. 3(1) of the Value Added Tax Act 1994 as a person who ‘is, or is required to be, registered under this Act’. The value of the supplies made by Euro-tex to the appellant alone was sufficient to require it to be registered. The documentary evidence to be provided under reg. 13 of the Value Added Tax Regulations 1995 was a VAT invoice provided by a ‘registered person’ who makes a taxable supply to a taxable person. Since Euro-tex was not at the relevant time a registered person, reg. 13 could not apply and so there was no ‘document required to be provided under reg. 13’. This being so, the necessity of holding a valid VAT invoice as required by reg. 29(2)(a) no longer applied and, provided evidence was available to show that a taxable supply was made, that was sufficient to entitle the appellant to input tax deduction. Accordingly, there was no question of the commissioners having a discretion. Alternatively, the appellant submitted that if it was found that the commissioners did have a discretion within reg. 29(2), the evidence produced to show that the supplies were made and paid for meant that the only proper exercise of that discretion was for the commissioners to allow the input tax claim.

The commissioners submitted that it was for the tribunal to decide whether the supplies to the appellant were qualifying supplies of goods. If they were, then it should consider whether the invoices were valid and if they were not, it must decide whether the commissioners, in their discretion, should have considered there to be sufficient alternative evidence of the charge to VAT. In the commissioners' opinion, except for the goods identified on the two earliest invoices, there was no qualifying supply, since Euro-tex was no longer VAT-registered at the time the alleged supplies were made. VAT could not have been charged and, therefore, there was no input tax for the appellant to claim. If there was no qualifying supply of goods, the commissioners could not exercise discretion to allow deduction of the purported input tax because they had no authority to allow a taxpayer to treat as input tax something which was not input tax. The commissioners made a further submission in the event that they were wrong and that the tribunal did find there were supplies made by Euro-tex which were taxable supplies made by a taxable, albeit unregistered, person. They maintained that it was only possible for the appellant to deduct input tax if the VAT charge was evidenced as the relevant regulations provide or as the commissioners otherwise permit, in accordance with reg. 24(6)(a). The effect of reg. 29(2) was that to claim input tax, a taxpayer must hold a valid VAT invoice. In this case, the supplier was not registered and was unable to issue a valid VAT invoice. Consequently, the claim could only be allowed by the commissioners exercising their discretion. In the commissioners' view, their refusal to exercise discretion in favour of the appellant was reasonable in view of his failure to keep proper records of the relevant transactions or of the supplier. The tribunal allowed the taxpayer's appeal in part.

1. The tribunal decided that the supplies detailed in the first two invoices, issued while the supplier was registered for VAT, were taxable supplies made by a taxable person. The invoices held by the appellant were valid VAT invoices within reg. 29(2)(a) and the VAT charged was deductible as input tax.
2. The value of supplies made by Euro-tex to the appellant after its registration was cancelled was by itself in excess of the registration threshold. Therefore, Euro-tex was a person required to be registered for VAT, and was thus a taxable person within s.3 of the Value Added Tax Act 1994.
3. Since reg. 29(2) did not specify a document or other specific evidence in the case of a supply from a person who is taxable but not registered, the situation must be regarded as falling within the proviso to reg. 29(2), so that the taxpayer must hold such other evidence of the charge to VAT as the commissioners may direct, at their discretion.
4. The commissioners in seeking to exercise their discretion had asked the appellant to produce alternative documentary evidence of the supplies, but the appellant had been unable to do so. In refusing to allow the input tax claim, the commissioners did not act unreasonably.
5. The outcome for the appellant would have been different had he maintained better business records or acted with more circumspection in his dealings with his cash suppliers.
6. Input tax deduction was allowed in respect of the supplies invoiced while Euro-tex was registered for VAT, but the commissioners' decision to refuse input tax credit for supplies invoiced subsequently was upheld.

No. 20,119