VAT & Paper Trails

MSD Wholesale lost its appeals against a £470,000 VAT assessment, over £2.5 million in excise duty, and the refusal of its alcohol wholesale registration. A significant result, and one with clear lessons.

The VAT issue centred on whether MSD had actually paid its suppliers for nearly £3 million in purchases. To support its input tax claims, it produced spreadsheets and payment receipts for large cash transactions. The Tribunal was not persuaded. There was no audit trail, no cash book, and no credible explanation for how the company held such substantial sums of cash in the first place.

The suppliers did not help matters. HMRC regarded them as missing traders. One had been wound up with no evidence of alcohol ever being held at its warehouse; another had its VAT registration hijacked. Critically, MSD's own due diligence report on one supplier noted that it did not accept cash payments above £11,000 - directly contradicting MSD's claim of making cash payments of up to £80,000 to that same supplier.

The VAT regulations are clear: if payment cannot be demonstrated, the right to reclaim input tax falls away. The burden of proof sits with the taxpayer, and unsupported records will not discharge it.

Three points worth noting for any business or adviser:

• An invoice and a receipt are not sufficient for large transactions. A verifiable payment trail is essential.

• Repeatedly trading in tax loss chains will undermine any due diligence defence.

• The credibility of your suppliers can directly affect your own tax position.