Neil Warren considers the case of Quality Engines Direct Ltd(QEDL), which concerned two sales of silver ingots, where the VAT at stake was £60,062. The court decided that no output tax was payable on those sales because the company didn’t own the goods.
What is a silver ingot?
My first thought when I read this fascinating case (TC06403) was: what is an ‘ingot’? A Google search confirmed it was a “block of steel, gold, silver or other metal, typically oblong in shape”.
The first question to consider is how a company whose main activity is to sell engines for road vehicles could make two sales of silver ingots for the princely sum of £360,374, supposedly to Microring Ltd (with sales invoices raised by QEDL to Microring).
HMRC assessed output tax of £60,062 ie one-sixth of the proceeds. The assessment was raised by HMRC according to VATA 1994, s 73(1), using its powers of best judgment.
Bizarre trading situation
The trading background is unusual, to say the least. The director of QEDL, Mr Rafiq, claimed that he had agreed to sell the shares in his company for £5,000 to a Mr Healey. Then, soon after their meeting but before an actual deal was agreed, a large package of silver arrived at the trading premises of QEDL, which was subsequently removed at the insistence of Rafiq.
However, two receipts for £177,660 and £182,714 appeared in the bank account of QEDL which, following discussion with Healey, led to two payments out of the account being made for £175,417 and £180,000 to a separate company called Progress-Consul 7. The balance remaining of £4,957 being relevant to the purchase of the shares by Healey.
Rafiq denied issuing the two sales invoices to Microring and also claimed to have no knowledge about the silver (neither he nor his company had ever owned it) or the payments into the company’s bank account. He said that Healey was seeking to acquire a shell company rather than a trading business. The appeal was allowed.
The judge said: “We accept Mr Rafiq’s evidence that the movements in QEDL’s account represent Mr Healey using QEDL for his own purposes rather than representing payment to QEDL by Microring for the Silver.”
The tribunal report read a bit like a scene from the BBC drama McMafia with goods and money appearing in all sorts of places, which no-one seemed to know where they came from or where they were going to. Amongst the confusion, the sole question was whether QEDL ever owned the silver so that it could sell it on as a taxable supply.
The judge felt the answer was ‘no’, so the assessment had to be withdrawn. This was a very strange case and the phrase ‘balance of probabilities’ was used by the judge in his report.
The conclusion is that a business cannot sell goods it does not own in the first place, and the other important message is to never reveal your bank accounts details unless it is absolutely necessary!
Input tax claims
Another learning point (a mirror image to the silver deal) is that you can’t claim input tax on goods you don’t own, even if you have a tax invoice made out to your business for the goods in question.
I recently dealt with a query where a supplier incorrectly addressed an invoice to an associated company with a similar name. The solution in this situation is to get the supplier to issue an invoice to the correct company and not for the associated company to make an incorrect input tax claim.
About Neil Warren
Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.