It is a fact of life for accountants and tax advisers that not all businessmen keep perfect records. When it comes to VAT, this can be an expensive problem, as the business has no right to claim input VAT unless it holds a valid VAT invoice.
In McAndrew Utilities Ltd v Revenue & Customs Commissioners ( UKFTT 749 (TC), published on 21 December 2012), the taxpayer had claimed £89,507 of input tax, but Mr McAndrew had also admitted that he did not keep good records. In fact, he said he kept all the details of the business in his head. HMRC has the discretion to accept alternative evidence if a valid VAT invoice is not held by the taxpayer; however, the Tribunal was only prepared to allow £6,037 of the taxpayer’s claim. The case offers a useful illustration of the practical limits of the use of ‘alternative evidence’.
On 10 April 2003, Article 24(6)(a) of VAT Act 1994 was amended so that HMRC could accept additional information (e.g. oral testimony) as well as additional documentation as alternative evidence. However, what constitutes alternative evidence is tightly controlled.
HMRC’s 2007 Statement of Practice includes the following list of example questions. HMRC expects the taxpayer to be able to answer most of these questions, but “in most cases this will be little more than providing alternative evidence to show that the supply of goods or services has been made”.
- Do you have alternative documentary evidence other than an invoice (e.g. supplier statement)?
- Do you have evidence of receipt of a taxable supply on which VAT has been charged?
- Do you have evidence of payment?
- Do you have evidence of how the goods/services have been consumed within your business or their onward supply?
- How did you know that the supplier existed?
- How was your relationship with the supplier established? For example:
- How was contact made?
- Do you know where the supplier operates from (have you been there)?
- How do you contact them?
- How do you know they can supply the goods or services?
- If goods, how do you know the goods are not stolen?
- How do you return faulty supplies?
In the current case, the Tribunal said that “alternative evidence” should be “evidence that a particular supply took place in similar detail to that which ought to have been contained in a valid invoice, had one been available”.
The records which McAndrew Utilities Ltd did hold were generally only photocopies of purchase invoices which omitted various details required by law, such as what was purchased, the quantity of materials, the rate of charge, the time of supply and so on.
HMRC made visits to some of the suppliers and the taxpayer was asked to recall details of each supply. Unfortunately, Mr McAndrew simply could not remember details such as contacts’ names, the site worked on and background checks on suppliers. HMRC also found that some suppliers had moved away or their records did not match what the taxpayer had recorded.
The Tribunal allowed the input tax to be repaid on just two purchase invoices (£6,037), for which they found that the supplier had provided sufficient additional information. The remainder (£83,470) was disallowed.
It was noticeable that the Tribunal commented repeatedly on the description of the supply in the photocopied invoices, considering examples such as the following to be inadequate:
“Supply of plant labour and materials”
“Plant hire and Van hire / hire of small tools”
“Provide labour on the Swelic/Notts Scheme”
There are two lessons to draw here. First, the best practice for taxpayers is to ensure that their suppliers’ invoices are adequate, on pain of losing their input tax recovery. This is particularly important in light of the new invoicing rules being implemented across the EC, as HMRC Officers are now likely to be even more sensitive to inadequate VAT invoices. Where an inadequate invoice is identified, the first step should always be to ask the supplier to reissue their invoice as an adequate VAT invoice.
The second lesson is a positive one: it is possible to claim input tax when purchase invoices do not contain all the required details. In McAndrew Utilities Ltd’s case, the input tax on two purchase invoices was repaid to the taxpayer when the supplier provided additional information to supplement the invoice. In essence, HMRC should be satisfied if all the details required in a VAT invoice can be evidenced from other sources, which in practice boils down to evidencing that the supplies were made as claimed.