VAT: HMRC’s assessment was unreasonableby
HMRC raised a VAT assessment for £41,684. Following a single observational visit to the taxpayer’s restaurant, the FTT ruled the assessment could be set aside.
Brough East Yorkshire Ltd (BEY) incorporated in 2011 and started to operate as a restaurant shortly after. HMRC visited the restaurant premises on a Friday in March 2017 and observed takings of £1,656.91. The HMRC investigation compared these sales to a three-year period based on the client’s VAT records, which showed average Friday takings to be £1,082.00.
HMRC further noted that not only were the sales on the day of the officers’ visit higher than both the average and maximum sales for previous Fridays, but that recorded sales rose following their visit. Clearly sales had previously been supressed and the taxpayer was now guiltily reporting the correct figures!
An assessment for £41,684.00 was issued, but due to errors in HMRC’s calculations this was later reduced to £34,486.00.
BEY provided evidence to HMRC to show that their sales had in fact been increasing for some time, due to a combination of factors such as a ‘menu drop’ to local homes, an increase in prices and several competitors going out of business. They provided records to HMRC to support this, including a detailed breakdown of sales between cash and card.
HMRC stood by their guns and BEY appealed to the first-tier tribunal (TC08213).
The FTT noted that BEY would need to show that the assessment was ‘wholly unreasonable’; it would not be enough to demonstrate that the assessment did not reach the standards of a competent officer.
The threshold for making a ‘best judgement’ decision by HMRC was noted to be low. All that needs to be established is: Was there an honest and genuine attempt by HMRC to make a reasoned assessment?
An assessment may be proved later to be inaccurate due to additional evidence surfacing, but it would still be considered ‘best judgement’.
BEY put forward that HMRC had not provided evidence to support the assertion that cash sales were being supressed and that its methodology had been flawed throughout. The FTT noted that HMRC had made numerous calculation errors throughout the contact with BEY and agreed that there was a lack of explanation for the HMRC methodology.
HMRC had stated that cash sales were being suppressed, but it had no evidence to suggest how this suppression had occurred and, by its own admission, the officers had not noted any anomalies while observing BEY.
Also, while the HMRC visit had lasted a few hours, it was revealed that the lead officer had only been present for a grand total of eight minutes during the visit – hardly a suitable length of time to gather the evidence for a ‘best judgement’!
Despite this, HMRC felt a second visit had not been needed as it was already satisfied following the first.
The HMRC officer noted that “the price increase would obviously have affected the level of takings”, but then later seem to have been surprised when this exact event happened. The officer was also unaware of the fact a mass menu drop had taken place, despite having seen the pile of menus on the counter during the (brief) observational visit, and had been given the receipt for the printing of the menus at a later point.
The FTT found that BEY had been very cooperative with HMRC, providing evidence to answer all queries. HMRC had disregarded much of this evidence and continued with the assertions regarding supressed sales, with no evidence of its own to support this, other than noting sales were higher than the previous average and had increased after the officers’ visit. BEY had already explained why this was the case. Finally, the fact that HMRC had compared a single night’s sales to a three-year average was held to not be a reasonable comparison.
It was therefore concluded that the assessment raised was unreasonable and did not take into account several matters which had been brought to HMRC’s attention. The FTT confirmed that BEY had met the burden of displacing the assessment and it was to be set aside.
A comparatively small amount of VAT was found to be due by BEY’s accountant. The appeal was therefore only a partial success and HMRC’s figure of £34,486.00 was replaced with BEY’s figure of £3,780.00. A much-improved outcome!
Once an assessment has been made, it is up to the taxpayer to displace that assessment. HMRC did minimal legwork and leapt to some quite unfounded conclusions, which could have been costly for the taxpayer. Luckily BEY were able to convince the FTT and so were therefore (mostly) successful in their appeal.