HMRC takes a battering in cake shop VAT caseby
When HMRC issued assessments based on best judgment for a cake and sandwich shop business, the first tier tribunal ticked the tax authority off for poor calculations.
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.
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, , Van Boeckel vs HMCE  and HMCE vs Pegasus Birds . 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.
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.
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James has over 30 years experience in VAT having trained with HM Customs & Excise he has worked in practice, including a Big Four firm as well as running his own consultancy. He also has extensive experience in public sector VAT, as well as previously advising the Federation of small businesses.