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Poor Record-Keeping is a Recipe for Dispute with the Tax Authorities

Sensible businesspeople understand that failing to keep proper accounting records and paper trails of transactions is an invitation to dispute with the tax authorities. In a case on point, a property developer came within an ace of incurring a substantial VAT liability in respect of commercial loans which were in fact exempt from VAT.

The developer, which for various reasons could not obtain finance from mainstream banks, obtained loans totalling £282,000 from a private finance company in order to fund a construction project. A director of the developer had been a close friend and business associate of a director of the lender for over 20 years.

The developer's record-keeping was poor during the relevant period and some of the loans were not reflected in its accounts. There was also some confusion as to whether loans had been made to the developer, backed by its director's personal guarantee, or to the director himself.

Following an investigation, an officer of HM Revenue and Customs took the view that the developer had failed to prove that the money passing into its account from the lender represented VAT-exempt commercial loans rather than payments for taxable supplies. On the basis that the developer's VAT returns were incomplete, it was assessed for £47,000 in VAT on the money it had received.

Upholding the developer's appeal against that assessment, the First-tier Tribunal (FTT) noted that its accounting records had now been brought up to date so that they accurately reflected its indebtedness to the lender. The developer had also supplied documents to the FTT which established that it had entered into enforceable loan agreements with the lender.

Although documents provided to the investigating officer were incomplete, he had erred in that the developer had placed sufficient evidence before him to establish that its relationship with the finance company was that of borrower and lender. The developer had not been obliged to include the loans in its VAT returns, which were therefore not incomplete.