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Candid camera confirms taxpayer’s honesty

A taxpayer’s CCTV evidence proved her nail bar had traded below the VAT registration threshold and that HMRC’s calculations of her income were flawed.

1st Sep 2020
Independent VAT Consultant
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Imagine you own a business with an annual turnover of around £50,000, ie your level of trading is comfortably below the VAT registration threshold. 

A team of HMRC officers come knocking at your door in 2018, and based on their findings and observations of about one week’s sales, they decide you have suppressed 50% of your sales and should have registered for VAT six years ago in January 2013. They also present an assessment for £90,979 for the arrears. 

This is a summary of the facts in the FTT case of the nail business owned by Ly Nguyen (TC7705). 

CCTV recordings

The taxpayer challenged the assessment and did something I have never seen before to prove the credibility of her takings: she produced CCTV recordings of her nail salon for trading undertaken in 2019. The recordings were for complete days and showed how many customers she had served and how long their treatments lasted. She also produced client letters with the treatment times, along with till rolls and banking summaries for the same period. 

Evidence accepted

The bundle of evidence clearly impressed the tribunal, which accepted that it was relevant, despite the fact that the CCTV recording dates fell outside of the late registration period. The hearing was postponed to give HMRC time to analyse the content of the recordings and other documents. 

HMRC review

HMRC reviewed the video evidence and confirmed that the takings figure on 29 January 2019 (the random day it chose) was £208 and nine customers were served. The till rolls and CCTV evidence reconciled completely. It also checked 12 March and applied general checks for February 2019. 

My reaction was: a business with sales of £208 in a typical trading day is comfortably below the VAT threshold, even if it traded seven days a week.

Tribunal calculations

The tribunal did its own calculations, and estimated annual turnover on the following basis:

Average number of customers per day x Average payment from each customer x 6 trading days each week x 51 trading weeks. 

The judge’s method produced the following result:

10 customers per day x £25 average spend x 6 trading days = £1,500 per week projected takings ie £76,500 for a 51-week trading year. 

In 2013, the registration threshold was £77,000, rising by £2,000 in each of the following years, so the tribunal accepted that the business had always traded below the registration threshold. The taxpayer’s appeal against late VAT registration was allowed. 

Weak evidence 

I visited a pub when I was an officer in Customs & Excise around 30 years ago and presented a mark-up exercise to the owner, indicating a large suppression of sales by his business. To my surprise, he accepted the calculations straight away and my conclusion was therefore that I’d understated the total suppression figure and he knew he had achieved a good result. He promptly paid the assessment and we never heard another peep from him.

It is clear in the Nguyen case that HMRC’s evidence was weak; the invigilation period covering one week’s trading was too limited; the calculations were flawed and, most importantly, the taxpayer was confident that her declared sales figures were accurate, unlike my publican. The CCTV evidence was her trump card. 

Learning point 

HMRC’s VAT Assessments and Error Correction manual (policy note VAEC1460) includes a comment that the best assessments are those where the officer’s chosen method of calculation is supported by other evidence that indicate sales have been understated. That didn’t happen in this case because the conclusions were solely based on the results of one week’s invigilation exercise. 

The judge’s calculations were much more logical and produced a sensible result.

Replies (14)

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By memyself-eye
01st Sep 2020 13:22

I hope the taxpayer got her costs back!
A 'team' visits one woman's small business and seeing she's (I'm guessing here) not English, and can therefore (I'm guessing again) be easily bullied; decide that chasing real villans is too difficult - this one's a much easier target (I'm not guessing now).

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By Richard Grant
01st Sep 2020 16:37

If she hadn't had the CCTV evidence she would potentially have lost everything, house included on totally fabricated figures. It shows how one sided this assessment process is with a lot of "off the record" threats thrown in as well. When a taxpayer wins (very rare ) the inspecting officers should be made to pay the false assessment personally and then be sacked, maybe it would focus some minds.
Inevitably when these assessments are delivered there is usually a quiet chat along the lines of "if you don't pay up and shut up we will take this back six years and see how you like that!". Before you deny it I've seen it many times.

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By SXGuy
01st Sep 2020 17:33

Hmrc have hated nail/hair salons since the dawn of time, it's no wonder their assessment was heavily flawed.

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By johnjenkins
02nd Sep 2020 10:04

A great article, Neil and one that highlights what is needed to prove assessments fictitious. Normally Customs would have done their own CCTV to see how many customers went into the shop over a period of 3 months using different days. Maybe they've had some good results without doing much work and are getting slack. That's always been the difference between Customs and Inland Revenue. Customs always used to do their homework properly (apart from the pea counting scenario in the fish and chip shop).

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By why always me
02nd Sep 2020 10:25

Sadly not that uncommon from HMRC. Most have never worked in the real world and have all these fabulous averages and statistics to prove taxpayer is under declaring (there starting position). There have even been a few who have paid relatively small assessments that they are adamant are incorrect, but life is too short and some (not all) inspectors are unreasonable and from what I can see unaccountable.

Just completed an enquiry where clients records where shocking (previous agent told them no need to keep records, just tell them what she made!). One taxpayer with employees, original assessment over £300,000 and inspector happy to take to tribunal. Two and a half years later £30k, which was our original figures based on means test. Said inspector promoted 2 months before end of case.

If I make that big a mess, I am reprimanded at least, civil servant promoted out of the way!!

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Replying to why always me:
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By Expat24
02nd Sep 2020 14:19

And said Civil Servant eventually gets to collect a fat pension (paid for by us!) for being incompetant.

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By Husbandofstinky
02nd Sep 2020 11:11

Simply awesome.

Regardless of the CCTV, to have spot on, picked at random, reconciled records is an achievement in itself. Most definitely something you don't come across every day in the real world and this industry.

She deserves a trophy, not just a medal.

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By petestar1969
02nd Sep 2020 11:16

Great result for the business owner. Super lucky that in the first year the judge calculated her turnover at just £500 below the threshold.

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By AndyC555
02nd Sep 2020 11:23

No doubt the government will be back at the salon shortly to release all the slaves that work there.

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Replying to AndyC555:
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By Ken of Chester le Street
02nd Sep 2020 12:25

AndyC555 wrote:

No doubt the government will be back at the salon shortly to release all the slaves that work there.


I agree your point absolutely, but this was an article about tax. In particular, it was about HMRC abusing their powers. Their time would have been better spent using their powers under The National Minimum Wage Act 1998 (‘the 1998 Act’, as amended, including by the Employment Act 2008 Act (the ‘2008 Act’)). But that's what you were saying , wasn't it? You are referring to a national scandal, but I suppose they thought there was a yield in the approach they were taking.
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By meadowsaw227
02nd Sep 2020 11:26

I'm more interested in the observed weeks sales in 2018 . Double the norm ! .
She can only do so many nails in a day, Hmm

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By Marlinman
02nd Sep 2020 11:26

I feel sorry for the poor woman. She could have lost everything because of these evil people.

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Replying to Marlinman:
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By Ken of Chester le Street
02nd Sep 2020 12:27

See Andy C's comment just above

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By thehaggis
05th Sep 2020 12:06

You do realise that this innocent person has, apparently, been suppressing her turnover year on year. The Tribunal’s assessments was nearer HMRCs view than her accounts.

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