‘Best judgment’ cases are quite common in relation to cafes and takeaways. HMRC carry out a sample exercise and extrapolate their findings over a number of years. The legal arguments are well rehearsed and HMRC lose very few Tribunal cases. This case involved a company running a number of Subway stores, involved some sloppy work by HMRC, resulting in their case being defeated at First Tier.
There are a number of factors which are mentioned in the decision which practitioners might note.
Part of the assessment was lost because HMRC were time-barred. There is a maximum of four years which HMRC can assess, except in the case of criminal fraud.
Next the calculation had to be revised because the Officer had used net sales instead of gross sales in her calculation.
On review, the Reviewer Officer upheld the calculation, even though the assessment was subsequently found not to meet the ‘best judgment’ test.
The assessment failed the ‘best judgment’ test because it was based on the numbers of transactions. See paras 13 and 14 of the decision for the Tribunal’s comment. The Tribunal went on to comment about a preferable methodology using the comparative value of sales at different rates of VAT: “Assessment by reference to the comparative value of sales upon which VAT was and was not due would not have been a difficult auditing exercise to undertake because the till gave details of the make-up of all of the sales so that it would have been possible to distinguish goods on which VAT was chargeable and those upon which it was not due.”
The taxpayer also raised the issue of sales promotions, Meal Deals in the case of Subway. When the customer has a takeaway Meal Deal items are supplied at different rates of VAT. It is unclear from the decision what conclusion the FTT reached on this issue. In my opinion an apportionment may be carried out based on the usual selling prices of the items, so the discount is applied proportionally across the items.
The case also mentions the important Rahman case in relation to best judgment (para 24).