Independent VAT Consultant
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Over-pumped VAT assessment

In an embarrassing outcome for HMRC, the FTT found a VAT officer failed to show ‘best judgement’ when calculating that a service station understated its sales by over £5,000 per day.

7th Jul 2020
Independent VAT Consultant
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Petrol station

There are times when I am reading a VAT tribunal case report and say to myself: “No way will HMRC win this”. This applied to the FTT case: FW Services Ltd (TC7636), about whether HMRC’s assessment for £686,054 of VAT on understated sales would be upheld.

It related to output tax allegedly underpaid by a small petrol station in Northern Ireland on diesel sales. It covered the period from 1 June 2015 to 31 October 2017, noted by the judge as 792 days, ie £866 of VAT per day.

The law

The power of ‘best judgment’ is given to HMRC by s73(1), VATA 1994. It means an assessment can be raised if an officer considers that VAT returns have understated the amount of tax due, ie input tax has been overclaimed or output tax understated. The majority of assessments relate to output tax and alleged suppression of sales.

Taxpayer win

In my view, this case was very embarrassing for HMRC. The HMRC officer’s assessment was full of holes. The appeal was allowed by the judge with the simple comment that “the assessment is excessive” and it was reduced to zero.

The interesting issue is to analyse the five main weaknesses in the HMRC case:

  1. Invigilation periods were imbalanced

The HMRC officers spent a total of 16.5 hours over five different days observing the premises and the mix of sales made between diesel and petrol. They concluded that the business sold 350 litres of diesel an hour between Monday and Saturday and 175 litres an hour on a Sunday. They compared these figures to declared diesel sales and assessed the difference.

But three out of the five days were Thursdays and there were no evening or weekend sessions. The periods were imbalanced, as the judge noted.

  1. Dodgy maths

The judge criticised HMRC for not recognising that the station was open for fewer hours on a Saturday than on weekdays. The assessment was therefore immediately overstated.

The HMRC officer also had no basis for concluding that Sunday sales were 50% of sales made on other days, this percentage seemed to be no more than guesswork.

  1. Lack of supporting evidence

The HMRC officers could find no off-record bank accounts. There were also witness statements from two employees who confirmed they had seen no evidence of sales suppression or had ever been asked to understate sales recorded in the till. 

  1. Assessment lacked credibility

HMRC alleged that the petrol station had understated ‘cash sales’ by £4,116,324 in 792 days, a daily suppression rate of £5,197. That is an incredible amount of money!

Where did the money go, and why didn’t the officer consider HMRC’s guidance about the credibility of an assessment (see VAT Assessments and Error Correction Manual, para VAEC1510). In this modern age where most people pay for a packet of mints by debit card, is it realistic that customers paid for so much diesel by cash?

  1. Officer strategy was flawed

A perplexing part of the case was the comment that the invigilation periods did not cover evenings or weekends because “the three witnesses for HMRC all indicated their contracts of employment did not allow them to work in the evenings or at weekends.”

The judge rightly commented that “this does not mean that HMRC can simply rely on their observations made during their permitted working hours.” I find this limit on working hours very strange. I left Customs and Excise in 1997 and we certainly did invigilation work on all days and at different times. I thought flexible working arrangements had increased in recent years?


HMRC must ensure that a business pays the correct amount of tax. However, the onus is on the taxpayer to prove that a best judgment assessment is excessive, which was achieved in this case.  

Replies (3)

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By frankfx
07th Jul 2020 22:12

the £5000 plus per day is about 30,000 litres per week.

A tanker load of undeclared sales per week

Did HMRC check with the fuel suppliers?

There cannot be many.

A simple sensitivity analysis would have cast doubt on assessment

But who approved the maths within HMRC?

I am sure VIDEO cctv was on 24/7 at or near the station.

That would have spotted the 'missing' tanker !!

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By Tamara habberley
08th Jul 2020 09:56

Great to see a victory for common sense. Unfortunately these types of assessments based on invigilation exercises are quite common and sadly sometimes not contested by the tax payer when they should do so. I have successfully argued against assessments based on such exercises including a number where the facts and the assessment just didnt stack up. Ones that stick in my mind include an assessment that used 3 day's trade -just after a client invested in a new cooking range to replace a single ring - to assess for VAT on hot food over a 4 year period when the client physically could not all that heat food, and another that used data that assumed amongst other things that sales of meals on mothers day would be repeated 7 days a week for the rest of the year. I always advice people to contact their usual VAT advisor if HMRC are threatening to assess .

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By Brend201
08th Jul 2020 10:08

The plain facts as outlined above may not convey the real background. The HMRC staff were probably putting themselves at risk by sitting in their car in this area. There may be sound reasons why they were prevented from working outside office hours. It may all look a bit shoddy but they have my sympathy.

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