TC09555 - [2025] UKFTT 00748 (TC)

Merchant acquirer data was provided to HMRC which indicated that 3KH were in receipt of credit card income from sales made from the TSL premises. From within the purchase invoices provided it was also apparent to Officer Beard that 3KH had claimed input tax in respect of expenditure incurred in connection with TSL.

On 23 January 2019 Officer Beard wrote to 3KH. The letter, in part, concerned TSL. The letter noted that Mr Khan (on behalf of 3KH) had indicated that he understood that TSL was separately registered for VAT purposes, but Officer Beard had established that the TSL was not VAT registered until 24 July 2018. Information was requested and it was intimated either that input tax incurred in connection with the operation of TSL would be denied (on the basis that it related to the operations of a different VAT registered entity) or that output tax for sales from TSL would be assessed as due (and the input tax credit allowed).

3KH’s response to that letter dated 7 February 2019 claimed that TSL was a separate restaurant operating from premises licenced to 3KH. It was explained that the former derelict pub had been refurbished with the intention of being operated by 3KH. The input tax incurred was therefore said to have been validly claimed. However, financial difficulties with TSM in early 2017 meant that the project could not be completed and Mr Rameez Mansoor (RM) approached the directors of 3KH with a view to operating the premises. RM was said to have completed the refurbishment over a period of 18 months starting to trade in July 2017. It was claimed that royalties would be paid by RM to operate under the Tipu Sultan brand and such royalties were due to be payable from year 2 of operation. However, it was stated that at the end of year one the premises were handed back to 3KH who closed the premises for a short period before it was reopened in August 2018 by a different company. It was asserted that any output tax due was the responsibility of RM.

HMRC requested details of the arrangements between 3KH and RM. The response provided by MB claimed that invoices from suppliers to TSL had been paid by 3KH but had been processed by RM as input tax proper to TSL. However, no documentation or further explanation was provided.

HMRC wrote to 3KH on 23 May 2019. Inter alia, the letter communicated HMRC’s position regarding TSL. Officer Beard had established that RM was not VAT registered nor registered with Companies House as a director of any company. Further Officer Beard was unable to identify RM as resident at or owning the property the address for which was recorded on the purported agreements entered by him. It was noted that various claims to input tax had been made by 3KH in connection with the TSL property including for rent paid through to at least September 2017 (after the period from which it had been asserted the business was operated by RM) and in respect of kitchen equipment and food purchases.

A review of social media undertaken by Officer Beard had revealed posts from diners from April 2017 when the premises opened as Tipu Sultan despite the assertion that it had not opened until July 2017.

Merchant acquirer information demonstrated that 3KH’s accounts and card readers had been used by TSL throughout the period April 2017 to July 2018 and sums from the credit card providers had been received into 3KH’s bank accounts for the same period.

Officer Beard considered there was no evidence that RM was connected with TSL in any regard but rather the evidence supported a conclusion that 3KH were running TSL.

In the 50-page letter referred to at paragraph 29(1) above 3KH provided the following explanation/claims in connection with TSL:

Attached to the letter was the draft franchise agreement (Exhibit U), Exhibit V was the draft sale and purchase agreement. The list of payments made on behalf of TSL is shown in Exhibit S.

The Agreement at exhibit U is dated 30 March 2017 and between 3KH, RM and Naveed Arif (NA). It purports to be a loan agreement pursuant to which 3KH agreed to lend £750,000, interest free, to RM and NA “in respect of the business [TSL]”. The repayment date was 31 December 2018. If not repaid by the repayment date interest then became due on sums outstanding; the loan was otherwise not interest bearing. The loan was also repayable on the occurrence of an “Event of Default” which included where the business or affairs of RM/NA changed adversely to the extent that in 3KH’s opinion the ability to repay was substantially impaired. Clause 8 provided for RM/NA to promptly provide 3KH on request “without limitation audited accounts, financial statements, bank statements, statements of assets, cash flow forecasts” and other documents in connection the development of the TSL property from which TSL was to trade. RM/NA were required register for VAT and pay all taxes.

Exhibit V proceeded the agreement at Exhibit U but was not referred to in Exhibit U. Exhibit V purports to be an “Intent to Proceed” between RM/NA and 3KH dated 10 March 2016. Recital A states: “The Parties propose entering into a franchise agreement being [3KH] standard form of agreement a draft of which is attached.” An initial payment of £10,000 plus VAT became payable pursuant to clause 4 of the attached franchise agreement. We were not provided with the draft franchise agreement.

Further materials were provided on 16 December 2020 including an incomplete chain of correspondence between 3KH and RM’s legal advisors. It appears from the correspondence provided that a dispute arose between 3KH and RM/NA. The correspondence implies that RM/NA walked away from TSL, and a dispute arose as to the amounts due between the parties. Reference is made by 3KH to the loan agreement and the requirement to have repaid the capital sum. RM/NA claimed to have invested in the building project and the goodwill of the business operations. There is reference (acknowledged by 3KH in a letter dated 2 April 2019) to a further agreement pursuant to which 3KH had offered to pay £500,000 to RM/NA entered “at the time of the takeover” but that such sum had been agreed without understanding the poor condition of the property and the business. RM/NA demanded details of the funds received and paid out by 3KH on their behalf. It is not apparent that this information was provided, 3KH stating that only RM/NA “know which invoices they were asking [3KH] to pay … they will have a record of [the invoices paid]”. 3KH did however provide the merchant acquirer data of credit card income received. Reference is also made to what is said to have been agreed repayments against the capital of £40,000 per month. We do not know how the dispute was settled.

The annual accounts of 3KH for accounting period ended 31 July 2017 showed tangible fixed assets (plant and machinery) of £659,457 and debtors of £327,776 (of which trade debtors were £16,935 the balance recorded as other debtors) and no creditors. Those for the accounting year ended 31 July 2018 reported tangible assets of £906,738, debtors of £362,458 (of which £361,776 was other debtors)

All the evidence provided by 3KH was considered by Officer Beard. On 26 April 2021 he notified 3KH that nothing provided satisfied him that TSL was operated other than by 3KH. In particular, Officer Beard noted that within the additional purchase invoices provided there were invoices relating to the running of TSL (including printing of fliers, and repair of the dishwasher). Analysis of the credit card receipts for TSL and the purchases made for supplies to TSL Officer Beard calculated that the net position on August 2018 was £572,221.78 excess income over purchases. The pattern of trade was also consistent and there was no social media evidence of difficulties in operation or quality. As a consequence, in Officer Beard’s view, the evidence failed to support the narrative provided by 3KH that RM had ceased operations in August 2018 because of the number of complaints received (and hence the potential damage to the Tipu Sultan brand), a difficulty in operating the business or an inability to meet the asserted repayment obligations under the purported loan.

Neither was Officer Beard satisfied that the correspondence provided between 3KH and RM’s legal advisors supported a conclusion that RM operated TSL.

The witness statements provided the following narrative regarding TSL:

In oral evidence MJ explained that the original intention had been to grant a franchise to RM/AN but later on it had been decided to loan them the amount already spent by 3KH on the conversion. The phrase he used consistently, without explanation of his meaning of it, was that 3KH and RM/AN came to a series of “mutual agreements”. He sought to articulate that the amount spent was converted into a loan which although interest free would be repaid and the return to 3KH be achieved being through royalties which would be paid from year 2 of operation to allow them to establish the business. He provided a very confusing account of the impact of having permitted RM/AN to use the merchant acquirer account and the associated payment of suppliers. He indicated that no record was maintained of the balance outstanding on the loan at any particular point in time simply again repeating that the payment of suppliers was by mutual agreement. He could offer no explanation as to why the loan was not shown as an asset on 3KH’s balance sheet. He denied that the documents were a sham.

In his oral testimony MB accepted that 3KH was the lessee/licensee of the property from which TSL operated, that 3KH paid suppliers to TSL and received all credit card income through 3KH’s merchant acquirer account. However, he denied that 3KH were operating TSL. Suppliers were said to have been paid on the instruction of RM/AN from the credit card income received, though it was accepted that in some months the amount paid to suppliers exceeded the credit card income thereby increasing the value of the loan. He claimed that the original intention was for RM/AN to take a Tipu Sultan franchise but ultimately took a loan of £750,000 from 3KH by way of the work undertaken which, it was claimed, would be effectively reimbursed over the life of the loan. He claimed not to understand the questions put to him as to why neither the property costs incurred nor the loan were shown as assets in the financial statements, this despite having personally signed the accounts. He said he trusted the accountant. As with MJ he denied that the documentation was a sham.