Earlier this year, an intrepid officer from HMRC’s VAT hit squad, visited a small cake and sandwich shop and purely on a couple of hours observation, believed that the shop owners were deliberately minimising their Standard Rate (SR) sales. After a subsequent visit he concluded that the shop owners had knowingly understated their 20% SR sales and had therefore underpaid a considerable amount of VAT.
Standard Rate VAT Tribunal: What actually happened?
Alex Vine owned two sandwich and patisserie bars, both with a small amount of seating (four small tables in each), but essentially, they were take-away businesses and Output VAT was calculated using the retail point-of-sale scheme as set out in Public Notice 727/3.
On the first visit (to Shop A) our intrepid Vatman concluded that SR sales were around 11%, against an expected figure of 35% for this type of business. Surprised but not put-off by this unexpected result, he surreptitiously visited the second shop B, for a lengthier visit and this time calculated that the SR sales were 55% of total sales. He subsequently returned and examined the till register which showed SR sales at 25% of the total.
The VAT officer then had a meeting with Mr and Mrs Vine and their accountant, at which Mr Vine was asked to undertake a self-invigilation of records at Shop B for a two-week period. Following the results, HMRC wrote to Vine confirming the 55% figure from the first visit and that for the two-week invigilation the proportion of SR sales was 33%.
After further correspondence, HMRC issued assessments for the VAT periods that the shops had been open (5 years and 20 VAT Returns) based on the two-week invigilation of 33% SR sales. Mr & Mrs Vine disagreed and so the matter went to the first-tier tribunal (FTT).
Standard Rate VAT Tribunal: Case law
The 1994 VAT act gives HMRC the power to use best judgment when it believes records are incomplete or incorrect. In an earlier Upper Tier Tribunal case (Van Boeckel vs HMCE) the judge set out three tests:
- Firstly, HMRC must make a value judgment on the material set before it honestly and not knowingly set an inflated figure and then expect the taxpayer to disprove it on appeal.
- Secondly, there must be material proof 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.
Mr Vine alleged that the officer had acted dishonestly and capriciously in formulating the assessment, making arithmetical errors, not taking into account his explanation that he had significant Zero rate corporate sales, the effect of the weather and the level of SR table sales (until six months before the intrepid Vatman first visited, shop B did not have any tables).
Standard Rate VAT Tribunal: The honesty test
In order to set aside the assessment would require proving that HMRC had failed the test of honesty by not making a genuine attempt at a reasoned assessment; this very high bar not met in this case. However, the FTT used its powers to direct that the assessment be recalculated as HMRC had clearly made errors in its calculations, especially by ignoring corporate sales, which were all ZR and significant in amount.
Standard Rate VAT Tribunal’s decision
The Tribunal chair said that HMRC had made two major errors of judgement, firstly by relying on the invigilation at Shop B, when the corporate ZR sales were all at Shop A and secondly, that they did not factor in to their calculations that the SR table sales were clearly overstated, as one shop did not have any tables for the first 4 ½ of the 5 years covered by the assessments.
The Tribunal therefore came to the reasonable conclusion that HMRC’s calculations were incorrectly heavily skewed towards SR sales and reduced the assessments issued by a whopping 80%, they also reduced the associated penalties to Nil. In summing-up, he chair heavily criticised HMRC for failing to listen to issues raised by the appellant and also for several basic errors in calculating the amount of VAT due.
Tax Accountant’s view
I was not surprised to hear that HMRC had received a pie in the face having read the full FTT report. I’m appalled but not entirely surprised that the case, having been internally reviewed by HMRC’s legal team, was allowed to proceed without any changes to the original tax assessment.
This of course begs the question; how often are ‘best judgment’ assessments accurately calculated and is HMRC’s internal review system is fit for purpose in picking up errors. In Mr & Mrs Vine’s case, if this had been done properly, it’s likely that the matter would never have reached a tribunal.