In this case involving VAT assessments of cake and sandwich shops, HMRC issued an assessment and suspended penalty based on a best judgment valuation. The first tier tribunal (FTT) directed that the assessment be reduced finding that HMRC had made errors for the bulk of the assessment and allowed the appeal for one VAT period.
Aleksander Vinni owned two sandwich and patisserie bars, both with a small amount of seating, but essentially take-away businesses. The VAT retail point-of-sale scheme as set out in Public Notice 727/3 was used to account for VAT. Before the FTT (Aleksander Vinni trading as Honey Cake Patisserie and Sandwich Bar vs HMRC [TC08976]) Vinni said that staff were trained to identify whether sales were standard (SR) or zero-rated (ZR) and that his tills were able to process such sales. His wife produced a daily Z report and she also checked for errors, as did Vinni before he passed the records to his accountant who completed his VAT returns.
Visits and assessment
Routine checks by HMRC flagged up low levels of SR sales for a business of its type and size and a test visit was made by an officer to one sandwich bar. The officer concluded that SR sales were around 11%, against an expected figure of 25% to 35% for that type of business. A further unplanned visit was made to the other premises where expected SR sales were calculated as 55% of total sales, whereas the Z report suggested 25%. The officer met with Mr and Mrs Vinni at a further visit with their accountant and Vinni was asked to undertake a self-invigilation of records for a two-week period. Following the results, HMRC wrote to Vinni confirming the 55% figure from the first visit and that for the two-week invigilation the proportion of SR sales was 33.58%.
After further correspondence, HMRC issued assessments for periods 06/14 to 03/18 based on the two-week invigilation of 33.58% SR sale along with a penalty suspended for six months. A further assessment was issued for period 03/19.
Best judgment
Under VATA 1994 s73 HMRC has powers to use best judgment where it believes records are incomplete or incorrect. The FTT referred to the leading Court of Appeal and High Court cases on the subject of best judgment – Rahman trading as Khayam Restaurant vs HMCE, [2002], Van Boeckel vs HMCE [1981] and HMCE vs Pegasus Birds [2004]. In both Pegasus Birds and Rahman No 2 the courts considered whether best judgment had been made and whether the sums assessed were correct. In Van Boeckel, Woolf J set out three tests: firstly, HMRC must make a value judgment on the material set before it honestly and bona fide and not knowingly set an inflated figure and then expect the taxpayer to disprove it on appeal; secondly, there must be material available; and thirdly HMRC is not expected to do the work of the taxpayer but instead fairly interpret the material before it and come to a reasonable conclusion rather than an arbitrary one.
The appellant alleged that the officer acted dishonestly and capriciously in formulating the assessment including not providing an interpreter, arithmetical errors, and not taking into account Vinni’s explanations about corporate sales, the effect of the weather and times when the shops were not open.
The test of honesty
To set aside the assessment would require HMRC to have failed the test of honesty and whether a genuine attempt at a reasoned assessment had been made. This is a high bar not met in this case.
However, the FTT used its powers to direct that the assessment be recalculated as HMRC had made errors in its calculation, some not material but others more so especially in ignoring ZR corporate sales. The result was that HMRC’s calculations during the two-week self-invigilation were incorrectly skewed towards SR sales. There was one outstanding matter for period 03/19 where HMRC had assessed the appellant for making an incorrect adjustment for an earlier period. HMRC was wrong to deny the adjustment which adjusted an over-declaration of VAT and HMRC had acted arbitrarily and outside of the test for best judgment.
With regards to the penalty as it had been suspended and then cancelled there was no decision against which an appeal could be made.
Basic errors
The FTT reduced the assessment, criticising HMRC for failing to listen to issues raised by the appellant but also for basic errors in calculating the amount of VAT due. Given the matter had already been internally reviewed it begs the question how often best judgment assessments are accurately calculated and whether HMRC’s internal review system, which might have led to the matter never reaching tribunal, actually works.
Replies (15)
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looking forward to the first, have your cake and eat style comment.....oh [***] thats me!
Thanks (1)Can't HMRC appeal and get a 2nd bite of the cherry?
Thanks (1)Bakewell?
Thanks (0)Well that takes the biscuit?!
Thanks (0)Nice
Thanks (0)What a mess and a waste of time for everyone...
-not providing an interpreter
-arithmetical errors
-not taking into account corporate sales
-not taking into account the weather
-not taking into account times when the shops were not open.
-basic errors in calculating the amount of VAT due
-the seating capacity was changed
Bravo to those fine jobsworths
The assessments were made for the return periods 09/14 to 03/18 in the amount of
£22,658 and for the return period 03/19 in the amount of £594.02.
Thanks (5)Why do these bozo's (i mean at HMRC) ever get to a tribunal?
Internal 'review'... best judgement??
By whom?......Boris?
Small wonder the tax authority (belly laugh here) is so derided.
Thanks (2)This reminds me so much of a new central heating and plumbing client whose books had been given to the tax lady by his previous unhelpful accountant a year before.
The tax lady had said he'd fiddled his cash takings as lots more cash had gone through the bank than was in the books.
I asked for the books back and her workings prior to a meeting.
I went through them
...it only took an hour ...to find my client had switched the cash and cheque receipt columns in several months, but the tax lady hadn't on redoing the sales on to an accurate basis xll her " shortfall" disappeared. On being challenged she accused me of rewriting the books. I immediately asked to speak to her District inspector. The case was dropped very quickly. I never got an apology.
Thanks (4)I remember a VAT enquiry for a client who I know was correct as we did the bookkeeping and the year end accounts. The inspector claimed that the output VAT had been under-declared by around £50k (it's a while ago so can't remember actual figure). When I checked his calculations, it turns out that he'd mixed up the gross figure per debtors & the net figures per the P&L turnover. Not only that, he was using total debtors (including prepayments, other current assets) instead of just the trade debtors. In the end, he agreed that there was around £5 difference - most likely due to rounding differences!
At least he did apologise.
Makes you wonder if they actually have any accounting / tax training sometimes! May be a job requirement should be several years experience in practice for both inspectors and those who make up the various legislation / hoops we have to jump through?
Thanks (1)Glad that HMRC appolagised if only once. But they won't change. Over estimations are cheapest for HMRC whether or not they are legal.
One client referred to us after HMRC used the VAT escalator (I believe illegal in itself) that so fazed the client that he went missing with the latest inflated VAT demand his only identification when he was found weeks later.
Thanks (2)Whilst only mentioned obliquely, it demonstrates the futility of asking HMRC to review a decision. The review seems to be made on the decision of the officer and not on the facts on which that officer's decision was made. The process is geared to built in confirmation bias.
https://www.gov.uk/tax-appeals/review-of-a-tax-or-penalty-decision
"You will have your tax decision reviewed by someone at HMRC who was not involved in the original decision. This is known as a ‘statutory review’."
Aside from poor wording "someone", who a peer or the cleaner? No a member of staff in Revenue Solicitor's Office. Then "at HMRC" surely "in HMRC". So the good old boys/girls mark their own homework.
The FTT got stuck in to the process in Alexandra Countryside Investments Ltd [2013] TC 02751 where the review letter read on the matter of the review
"I refer to your later [sic] dated 23th [sic] February 2012 relating to the VAT reclaim for Period 04/11, in which you request an independent review. The Officer who has made the decision concluded after receiving policy guidance and having reviewed the case, I have upheld the Officer’s initial decision."
How could you trust a review where the reviewer could not spell letter or use 23rd choosing 23th? Perhaps it was the cleaner at HMRC Solicitor's Office.
The research shows that the public are inclined not to use the process preferring the tribunal. It really shows that when the chips are down the taxpayer tends to accept the cost of the appeal against the cheapness of a shonky (thank you M Hancock) review.
Thanks (1)I've said it before, and I'll say it again;
Oh crumbs!
Thanks (0)Things that don't exist:
HMRC’s internal review system
Answering calls in 10 minutes
Flat earth
Thanks (3)Reinforces my view that except with larger cases with say Special Compliance , which with the only one I ever did involved HMRC in house accountants being used, HMRC were always generally weak at debits and credits.
I appreciate this case was re vat and I never really defended vat enquiries, but my experience of CT/IT back duties was mainly similar, poor attention to detail, addition errors, not thinking about the business and how in reality it operated (one BD was a chip shop where the officer just did not think that potato costs varied significantly during the year so his mark up using just one purchase invoice to set the cost for his exercise to extrapolate was nonsense)
If HMRC want to really clamp down on smaller trader fraud (because it is out there) their investigation staff ought to be seconded to practice for two years and experience preparing accounts at the coal face, that or employ retired smaller practitioners to check tax payer records.
Thanks (0)The business of investigating small traders has never been cost effective. Everytime HMRC has tried it, failure followed very quickly. IR35 is a classic.
I do agree, and I have said this many times that HMRC and our bodies should have swops so that Accountants can get HMRC knowledge and vice versa.
It won't happen because HMRC are supposed to be "impartial".
Thanks (0)