Kohanzad & Anor v Customs and Excise

Factual and Procedural Background

This appeal was brought by a partnership trading as Giltedged Stationery, consisting of two individuals referred to here as Mr Rabi Kohanzad and Mr Nader Kohanzad. The appeal challenges the Respondents' refusal, communicated in a letter dated 24 July 2001, to pay interest under section 78 of the VAT Act 1994 or on any other basis.

The Appellants registered for VAT on 1 June 1997 in relation to a stationery manufacturing business. The dispute concerns input tax claims relating to purchases of a specific type of ring binder known as lay-flat binders. The Appellants acquired these binders from a company associated with a third party, Mr Mazurek, and payments were recorded through a 'barter account' that involved various transactions including properties and motor cars.

Mr Nader Kohanzad was prosecuted by Customs and Excise, with Mr Mazurek acting as a witness against him. The prosecution was discontinued before a verdict was reached due to procedural deficiencies and evidential concerns, including dissatisfaction with Mr Mazurek's testimony. The Appellants alleged the prosecution was intended to delay tribunal proceedings, a contention rejected for lack of evidence.

The Appellants claimed input tax of £94,500 in their VAT return for the accounting period ending October 1999, relating to the ring binders. Earlier claims for the same amount had been made but were unsupported by invoices, and Customs and Excise did not repay that earlier claim. The 1999 claim was supported by an initial version of the barter account, which lacked invoices but included an entry indicating a purchase of lay-flat binders without invoice support.

Customs and Excise withheld payment of the input tax claim and a prosecution ensued. Subsequently, the Appellants produced a different version of the barter account showing a significantly lower purchase value for the binders. Customs and Excise were entitled to withhold repayment until verification of the revised claim, which was eventually authorized following a visit by a customs officer who inspected the binders.

At a meeting on 13 September 2000 involving the customs officer, Mr Nader Kohanzad, and the Appellants' VAT advisor, an agreement under section 85 of the VAT Act 1994 was alleged by the Appellants to have been reached. The meeting included discussions about withdrawing appeals subject to costs and disbursements, and the repayment of the revised input tax claim was effectively agreed. However, no agreement was reached regarding interest payments.

Customs and Excise subsequently paid interest on the verified input tax amount from 1 February 2000 until repayment, mistakenly citing section 84(8) of the VAT Act 1994 as authority, though the payment was made at statutory rates applicable under section 78. Repayment supplements were also paid under section 79. The Appellants argued for additional interest, including on amounts never due, based partly on grievances related to the prosecution.

The tribunal found no agreement on interest was reached at the meeting, and that interest under section 78 was precluded due to the payment of a supplement under section 79. The Appellants’ claim for interest on a sum exceeding the amount due was rejected. The tribunal also considered the possibility of awarding interest under section 84(8) but deemed it unnecessary given prior payments.

Legal Issues Presented

1. Whether the Appellants were entitled to interest under section 78 of the VAT Act 1994 on their input tax claim.
2. Whether an agreement under section 85 of the VAT Act 1994 concerning interest payments was reached at the 13 September 2000 meeting.
3. Whether the payment of repayment supplements under section 79 precluded entitlement to interest under section 78.
4. Whether the tribunal had power to award interest under section 84(8) of the VAT Act 1994 in the circumstances of this appeal.

Arguments of the Parties

Appellants' Arguments

• The Appellants claimed entitlement to interest on the input tax amount of £94,500, including interest from a date in 1997, despite lacking invoices to support the original claim.
• They contended that an agreement to pay interest had been reached at the 13 September 2000 meeting under section 85 of the VAT Act 1994.
• They argued that they were entitled to compensation, or interest, related to the delay and effects of the prosecution against one of the partners.

Respondents' Arguments

• The Respondents denied any agreement to pay interest was reached at the 13 September 2000 meeting.
• They maintained that Customs and Excise were entitled to withhold repayment until the input tax claim was verified, given the discrepancies in the barter accounts.
• They asserted that payment of repayment supplements under section 79 precluded any entitlement to interest under section 78.
• The Respondents argued that no interest could be awarded under section 84(8) as no capital sum was in issue in the appeal.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
R (on the application of Elite Mobile plc) v Customs and Excise Commissioners [2005] STC 275	Interpretation of the phrase "falls to be increased" in section 78(2) of the VAT Act 1994 regarding the interplay between repayment supplements under section 79 and interest under section 78.	The court noted this case clarified that if a supplement could be paid under section 79, interest under section 78 is precluded even if no supplement has yet been paid. As that was not the situation here, the court did not require further submissions on this precedent.

Court's Reasoning and Analysis

The court carefully examined the evidence surrounding the input tax claims, the versions of the barter account, and the procedural history including the prosecution of one of the partners. It found that Customs and Excise were justified in withholding repayment until verification of the revised input tax claim was completed, given the significant discrepancies in financial records.

Regarding the alleged agreement under section 85 at the 13 September 2000 meeting, the court applied objective standards to determine whether an agreement had been reached. It found that while there was an effective agreement concerning repayment of the revised input tax claim and withdrawal of appeals, no agreement was reached on interest payments. This was supported by contemporaneous notes and the parties' testimonies.

The court further held that even if there had been an agreement on interest, it was not put into writing as required by section 85(3) of the VAT Act 1994, rendering it ineffective.

The payment of repayment supplements under section 79 was held to preclude entitlement to interest under section 78, in line with statutory interpretation and relevant case law. Although Customs and Excise incorrectly stated the legal basis for interest payments in correspondence, the court took a pragmatic approach, treating the payments as made under section 78 due to the applicable statutory rates.

The court considered the possibility of awarding interest under section 84(8) but concluded that no capital sum was in issue to justify such an award. Given that the Appellants had already received repayment supplements and interest to which they were not entitled, the court exercised its discretion to award interest at a nil rate, making further consideration unnecessary.

Holding and Implications

The court DISMISSED the appeal.

The direct effect of this decision is that the Appellants are not entitled to interest under section 78 of the VAT Act 1994 on the disputed input tax amount due to prior payment of repayment supplements under section 79. No agreement for interest under section 85 was found to exist, and no interest award was made under section 84(8). No new legal precedent was established, and the decision primarily resolves the specific dispute between the parties.