A Tribunal decision was released late last year which widens the type of situation where HMRC issue estimated assessments, instead of itemising individual errors in relation to particular supplies.
Estimated assessments are quite common when HMRC deal with retailers whose sales are understated; or where the proportions of standard rated and zero rated sales is clearly wrong; or where the taxpayer maintains incomplete records. That all seems logical! A sample exercise is carried out, and its results extrapolated. As long as the Officer meets the ‘best judgment’ test, the principle of the assessment will be upheld if the matter proceeds to Tribunal.
In this case, the same procedure was applied to B2B sales made by a printing company. The VAT Officer identified a number of supplies which were incorrectly zero rated (but not incorrectly standard rated!) in one VAT quarter. He then applied the additional output tax to a period of 21/2 years. The total assessed was £24,000, compared to an annual turnover of £500,000. Thus, the assessment was substantial for the size of business.
The taxpayer, in representing himself, argued that this was unfair, as he would be unable to invoice his customers for the additional VAT, since specific supplies were not identified; and therefore it would be a windfall to HMRC. Unfortunately, because the VAT Officer’s methodology was neither malicious nor capricious (ie: it met the best judgment test), the assessment was upheld.
This approach may well create an injustice, even if the taxpayer can invoice his customers for understated VAT. This is because the VAT assessed may exceed the VAT recoverable from customers.
On the other hand, the VAT recoverable from customers may exceed that assessed, in which case the taxpayer would have to return the difference to HMRC.
My concern is that this was not a ‘systematic’ error, in the sense that each quarter the same or similar errors were made. Yet it has been treated as such. Although the best judgment test was met, the HMRC process was, in my view, faulty. Unfortunately, the ‘approval’ by the Tribunal strengthens HMRC’s position against taxpayers.
(http://www.bailii.org/uk/cases/UKFTT/TC/2013/TC03117.html)
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