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Cite as: [2009] UKFTT 00015 (TC), [2009] UKFTT 37 (TC)

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T Singh Limited v Her Majesty's Revenue & Customs [2009] UKFTT 37 (TC) (02 April 2009)
VAT - ASSESSMENTS
Best judgment

TC00015

Value added tax – whether assessment made to best judgement – s 73(1) VATA 1994 – retail scheme – application of direct calculation scheme 1 – use of mark-ups to determine expected selling prices – adjustment of expected selling prices to take account of wastage and loss of stock – time limit for making assessment – s 77(1)(a) VATA 1994 – assessment made to best judgement but reduced by application of three year "capping" rule – appeal dismissed

LONDON TRIBUNAL CENTRE

T SINGH LIMITED Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY'S

REVENUE AND CUSTOMS Respondents

Tribunal: EDWARD SADLER (Chairman)

MOHAMMED FAROOQ

Sitting in public in Birmingham on 24 March 2009

The Appellant did not appear and was not represented

Mrs P Crinnion, advocate, from the office of the General Counsel and Solicitor to Her Majesty's Revenue and Customs, for the Respondents

Appeal heard in the absence of the Appellant under Rule 26 (2) of the Value Added Tax Tribunals Rules 1986

© CROWN COPYRIGHT 2009

DECISION

Introduction

This is an appeal by T Singh Limited (the "Appellant"), a limited liability company, against an assessment made on 11 August 2006 (the "Assessment") by The Commissioners for Her Majesty's Revenue and Customs (the "Commissioners"). The Appellant carries on the business of a supermarket retailer in Worcester. The Appellant has submitted its VAT returns in proper and timely manner, but the Commissioners were not satisfied that, by reference to the retail scheme adopted by the Appellant to calculate the output tax due, there was a correct statement of output tax in the Appellant's VAT returns. Accordingly, after an enquiry, the Commissioners issued the Assessment under their powers to make an assessment to the best of their judgement where it appears to them that a VAT return is incorrect.

The Assessment is for the aggregate sum of £10,789.00 together with interest of £1,069.24. The Appellant has not paid the VAT assessed, claiming hardship, which the Commissioners have accepted. The Assessment relates to each of the twelve consecutive VAT quarterly accounting periods of the Appellant beginning with the 07/03 period and ending with the 01/06 period.

The Appellant appealed against the Assessment by its Notice of Appeal dated 11 April 2007. The stated grounds for the appeal are: "We disagree on the mark ups used by the officer and the stock losses". The Commissioners have made repeated requests of the Appellant and its accountant representatives to provide details of the basis on which the Appellant so disagrees with the calculations used by the officer responsible for this matter, but nothing further has been supplied.

It is our decision, as explained in detail below, that the Assessment was made to the best of their judgement by the Commissioners, and that there is no basis for adjusting the amounts assessed. However, the assessment in respect of the first VAT quarterly accounting period was made outside the relevant time limits and therefore is invalid. Accordingly the Assessment (subject to a reduction for the amount assessed out of time) is upheld and the Appellant's appeal is dismissed.

Hearing the appeal in the absence of the Appellant

When the appeal was called on for hearing the Appellant did not appear, either in person or by his representative. The start of the hearing was delayed to give the Appellant time to appear. The clerk showed us the tribunal office file, from which it was apparent that due notice of the hearing was sent in November 2008 to the address from which the Appellant carries on its business, and had not been returned. We asked the clerk to telephone the Appellant, which she did. She was told that Mr Singh (the director of the Appellant who had filed the Notice of Appeal) was not available. She was given another number for him but on calling that number there was no reply, only a message answering service.

Mrs Crinnion, who appeared before us for the Commissioners, told us that she had sent the bundle of documents relating to the appeal and the hearing to the Appellant at its business address by recorded delivery on 27 February 2009 referring to the date of the hearing, and those documents had not been returned. Mrs Crinnion also told us that she had spoken to Mr Singh on the telephone, and he was aware of the hearing. A person who claimed to be an accountant representing the Appellant had telephoned Mrs Crinnion's office the day before the hearing, but had left no message and refused to leave his telephone number, so she had been unable to call him back. He had also called the tribunal office but had left neither message nor his number.

Mrs Crinnion pointed out that this matter dates back to an enquiry begun in January 2005, and that there has been a consistent history of the Appellant failing to supply information requested by the Commissioners or to discuss with the Commissioners the basis for a proper calculation of output tax due. The Commissioners had set out in detail the basis on which they had made the Assessment, but had had no response to that other than the Notice of Appeal. This lack of response was frustrating to the Commissioners, and, based on past conduct, she had no expectation that the Appellant would appear at a further hearing if the present hearing were postponed. She therefore asked us to proceed to hear the appeal in the absence of the Appellant, as we were permitted to do under the tribunal's rules.

We decided in these circumstances to proceed to consider the appeal in the absence of the Appellant under Rule 26(2) of the Value Added Tax Tribunals Rules 1986, taking the Appellant's case to be as set out in his Notice of Appeal.

The Appellant has the right, under Rule 26(3) of the Value Added Tax Tribunals Rules, to apply to the tribunal to set aside our decision, provided such application is served at the London tribunal centre within 14 days after the date when our decision is released. Mrs Crinnion told us that although she was not seeking an order from the tribunal that the Commissioners' costs for the present hearing should be paid by the Appellant, if the matter should come before the tribunal again the Commissioners may seek to recover their costs of any further proceedings from the Appellant.

The evidence and the findings of fact

The written evidence before us comprised the correspondence between the parties leading up to the issue of the Assessment; the notes made by Mrs Pauline Drew, the officer of the Commissioners conducting the enquiry and responsible for the Assessment, of her visits to the premises of the Appellant; Mrs Drew's manuscript notes relating to wastage or other loss of zero-rated stock; stock writedown reports supplied by the Appellant for the period 7 March 2006 to 30 March 2006 showing wastage or other loss of zero-rated stock; Mrs Drew's calculations of weighted mark-up percentages for items of zero-rated stock based on weekly purchase prices and selling prices; and Mrs Drew's calculations of output tax on standard-rated stock based on her calculations as to both wastage or other loss of zero-rated stock and weighted mark-up of zero-rated stock (those being the calculations which resulted in the Assessment).

Mrs Drew, who has the position of a temporary Higher Officer with the Commissioners, also gave evidence at the hearing, setting out the history of the enquiry, the information supplied to her, the method she had used to calculate the output tax due, the application of that method to the information available to her, and the resulting calculation of the under-declared VAT assessed in the Assessment.

From the evidence we find the following facts:

(1) The Appellant carries on business as a retailer operating a supermarket in Worcester. The business is of substance, and its accounts filed at the Companies Registry show a turnover of £1.190 million for the 12 months to 31 January 2005 and £1.397 million and £1.723 million for each subsequent year. The Appellant was registered for VAT with effect from February 2001. It makes both standard-rated and zero-rated supplies for VAT purposes. Its VAT returns for the period relevant to this appeal were prepared and submitted on its behalf by Doshi & Co, a firm of accountants.

(2) On 19 January 2005 Mrs Drew visited the premises of the Appellant to inspect their books and records. She interviewed Mr Tirath Singh, a director of the Appellant. From the information relating to preceding VAT returns provided by Doshi & Co subsequent to the visit Mrs Drew noted that the Appellant was using the Direct Calculation Scheme 1 as the method available to retailers to calculate the value of standard-rated retail sales (and hence the amount of output tax in making its VAT returns). She also noted that in applying this scheme the Appellant had used mark-ups of purchase prices in calculating its zero-rated sales based on what Doshi & Co claimed were industry averages (rather than the actual mark-ups achieved in the Appellant's business); that mark-ups were not reviewed quarterly; and that no adjustments had been made for wastage, loss, theft or price mark-downs of stock. In these respects Mrs Drew concluded that the Appellant had not applied the Direct Calculation Scheme 1 in accordance with the requirements of that scheme.

(3) Mrs Drew also noted that the Appellant operated a full electronic point of sale system, but did not use that system (or the information it recorded) for the purposes of compiling information for its VAT returns (Doshi & Co said that the Appellant found it difficult to use). The Appellant did not retain a daily Z reading from the EPOS system to record gross daily takings.

(4) The Direct Calculation Scheme 1 is not available to a retailer whose tax exclusive retail turnover exceeds £1 million. Mrs Drew noted that during the Appellant's VAT quarterly accounting period 01/04 the Appellant's turnover exceeded that threshold, at which point the Appellant should have opted to use another scheme for determining the value of its taxable supplies, but had not done so.

(5) Mrs Drew concluded from her enquiry that the Appellant had understated the VAT due in its returns by reason of its failure to apply correctly the Direct Calculation Scheme 1, and she first proceeded to make a "best judgement" assessment to recover the understated VAT by using a different retailer scheme, namely the Apportionment Scheme. She did so for two reasons: first, Doshi & Co had made calculations using the Apportionment Scheme to give the Appellant an indication of the different position if that Scheme were used in place of the Direct Calculation Scheme 1 (and since the result of using the Apportionment Scheme was less favourable to the Appellant, it was not used); and secondly, because the Appellant was not, by reason of its turnover, eligible to use Direct Calculation Scheme 1.

(6) However, upon review by the Commissioners in September 2005, this first assessment (made in July 2005) was withdrawn, the Commissioners taking the view that since they did not have the power to direct a retailer to adopt a particular retail scheme they could not proceed to make a "best judgement" assessment on the basis of a scheme different from that actually used by the Appellant. The Commissioners, in withdrawing the first assessment, advised the Appellant that it would have to select a different retail scheme for which it was eligible.

(7) Mrs Drew then proceeded to prepare an assessment using the Direct Calculation Scheme 1. After writing on several occasions to Doshi & Co seeking information from them about mark-ups used for the purposes of the VAT returns made, and receiving no satisfactory response, she made a further visit to the Appellant's premises on 6 March 2006. Mr Singh was not present, and Mrs Drew discussed the matter with Ms Kaur, another director of the Appellant. She also spoke on the telephone on that occasion to the accountant at Doshi & Co to repeat her requests for information (the information requested in the previous correspondence and in this telephone call has to date not been provided). Ms Kaur provided certain information as to the wastage records of the business for the three months to the date of the visit (all records for prior periods were said to be with the accountants). At Mrs Drew's request, Ms Kaur also provided a sample of invoices from various suppliers for different categories of zero-rated goods supplied by the Appellant in its business together with selling prices of those goods. Mrs Drew took the detailed figures for one week, but made a check to ensure that the volumes of sales and prices for that week were consistent with other weeks in the quarter for which Ms Kaur supplied the information.

(8) On 31 March 2006 Ms Kaur sent to Mrs Drew stock writedown reports produced from the EPOS system used by the Appellant showing all goods written down for wastage, loss and other reasons for the period 7 to 30 March 2006.

(9) Using the information supplied by Ms Kaur (and, for calculating wastage, using the EPOS stock writedown records rather than the incomplete information provided at the time of the visit), Mrs Drew proceeded to calculate the VAT due on standard-rated supplies applying the Direct Calculation Scheme 1 for the VAT quarters 07/03 to 01/06 inclusive. The detail of the method she applied is described below. Her calculations as to mark-ups and wastage (the two areas she had identified as being incorrect in the VAT returns made) were based on information relating to March 2006, that is, after the quarterly periods for which the Assessment was eventually made, but that was the only information available to Mrs Drew – the Appellant told her that all records and information relating to the quarterly periods assessed was held by the accountants, and they failed to provide it to the Commissioners, despite a number of requests made by Mrs Drew.

(10) On 28 June 2006 Mrs Drew wrote to the Appellant explaining in detail the calculations she had made using the Direct Calculation Scheme 1, identifying those items where she accepted the mark-ups used by the Appellant and those where she had calculated a reduced weighted mark-up. She also explained her calculations as to zero-rated sales after provision for wastage or other loss (based on the stock writedown reports). Finally, she explained how these calculations showed that the Appellant had understated its output tax in its returns for each of the quarters under review, and stated that she proposed to make an assessment for the aggregate amount of understated VAT (£10,789) plus interest unless she received any evidence to refute her calculations.

(11) The Appellant made no response to Mrs Drew's letter, and accordingly in July 2006 she prepared an assessment in those sums which was issued as the Assessment on 11 August 2006.

Direct Calculation Scheme 1

At the hearing Mrs Drew took us in detail through the method she had used in her calculations which resulted in the Assessment. Before dealing with that it is necessary to look at the retail scheme the Appellant (and, for the reasons explained, Mrs Drew) used, namely Direct Calculation Scheme 1. This Scheme, together with the other retail schemes available to retailers to determine from their gross sales the value of taxable supplies, is found in VAT Notice 727 (with a supplemental notice for each scheme), parts of which have the force of law pursuant to the VAT Regulations relating to retailer schemes (regulations 66 – 75 of the Value Added Tax Regulations 1995).

Where, as in the Appellant's case, the retailer makes (in terms of value) more standard-rated supplies than zero-rated supplies, the Direct Calculation Scheme 1 provides for the retailer to calculate the expected selling prices of his zero-rated goods by marking up at his gross profit margin for the items sold his purchase price for those goods (the retailer is required to calculate his mark-up on each line of goods or classes of goods, and there must be consistency in the method used to calculate the mark-up). The retailer is also required to make adjustments to the expected selling prices of his zero-rated goods to take account of factors which might affect the actual selling price, including such matters as wastage of goods, price promotions and discounts, theft or other loss.

The aggregate amount of expected selling prices of the zero-rated goods for the VAT quarter calculated in this way is then deducted from the gross takings for all goods sold in the VAT quarter, and the resulting figure is taken as the (VAT inclusive) amount of sales of standard-rated goods for the quarter, so that the amount of VAT charged as output tax on the standard-rated supplies is thereby quantified by applying the VAT fraction.

The methodology and calculations used in making the Assessment

As mentioned, Mrs Drew was concerned about the mark-ups used for different items by the Appellant in its application of the Direct Calculation Scheme 1 (the Appellant's accountants supplied the rates used, which they described as "industry averages"), and also about the apparent lack of any allowance made for wastage, reduced prices and similar factors which would have a bearing on the aggregate expected selling prices of zero-rated goods sold. If the mark-ups used were excessive that would inflate the expected selling prices of zero-rated goods which in turn would reduce the amount calculated as the sales of standard-rated goods; that would also be the consequence if the expected selling prices of zero-rated goods were not reduced to reflect goods which were not actually sold because of wastage, theft or similar loss.

To make her calculations, Mrs Drew first dealt with the issue of mark-ups for the zero-rated goods sold by the Appellant. She was told that the accountants used a mark-up of 30 per cent for groceries, snacks, bread and cakes, and dairy and eggs, and a mark-up of 33 per cent for newspapers. As explained, for her calculations she took from the information given to her by Ms Kaur a sample of one week's transactions (having checked that it was representative of the quarter as a whole). In each category of goods (say, dairy and eggs) she took the purchase price and selling price of each class of item (large eggs, medium eggs, standard milk, skimmed milk, etc) and calculated the mark-up actually achieved. This mark-up (expressed as a percentage) was then weighted to reflect the value of sales of that class of item in proportion to the value of total sales of the category of goods (that is, total sales for the week of dairy products and eggs). Her calculations resulted in her agreeing with the mark-ups used by the accountants in the case of groceries, snacks and newspapers, but resulted in a reduced mark-up for dairy and eggs (27 per cent instead of 30 per cent) and for bread and cakes (19 per cent instead of 30 per cent). Using these reduced mark-ups she calculated from the zero-rated purchase figures for each quarter taken from the VAT returns (or supplied by the accountants) a revised (i.e. reduced) expected selling price for the zero-rated goods, which in turn enabled her to calculate, in the manner set out above, the amount of under-stated sales of standard-rated goods and the consequent under-declared VAT for each quarter. On this basis the total amount of VAT under-declared for the twelve VAT quarters under review was £1,793.27.

Mrs Drew then dealt with the issue of wastage. She took the EPOS reported stock writedown figures supplied to her by Ms Kaur for the period 7 March 2006 to 30 March 2006 and treated those figures (in the Appellant's favour) as the figures for the whole of one month. She identified from the report those items which were zero-rated and calculated that zero-rated goods "wasted" in that month had an expected selling price value of £1,678.62. In the absence of other information, she extrapolated this monthly figure to give a figure of £5,035.86 for each VAT quarter under review as the amount by which zero-rated sales had been overstated for each quarter (and, correspondingly, standard-rated supplies understated), resulting in an under-declaration of VAT for each quarter of £750 (£9,000 in total for the twelve VAT quarters under review).

Taking together the total amount of VAT under-declared by reason of excessive mark-up (£1,793.27) and by reason of failure to take account of "wastage" (£9,000), and allowing for rounding of figures, Mrs Drew calculated that VAT amounting to £10,789 was due from the Appellant, and she prepared the Assessment accordingly in that amount.

At the hearing we questioned Mrs Drew as to why she had, in relation to the issue of "wastage", relied solely on the EPOS reported stock writedown figures when, from her visit on 6 March 2006 she was given other figures. She told us that the information given at the visit was not complete, and that she considered that the subsequent information provided by the Appellant from the electronic system provided a more comprehensive and reliable record of goods which were not sold or otherwise were written down. She also assumed that since it was provided subsequent to the visit, that was the information which the Appellant wished her to take into account. She explained that, as with all her calculations and the information she had used, she had invited the Appellant to challenge or comment on them, but no response of any kind had been made, either before or subsequent to the issue of the Assessment.

The relevant statutory provisions

The law in relation to the powers of the Commissioners to make an assessment where they consider that a taxpayer has under-declared the amount of VAT due in his VAT return is well-established. Section 73(1) of the Value Added Tax Act 1994 ("VATA 1994") provides:

Where a person has failed to make any returns required under this Act… or to keep any documents and afford the facilities necessary to verify such returns or where it appears to the Commissioners that such returns are incomplete or incorrect, they may assess the amount of VAT due from him to the best of their judgement and notify it to him.

In the present case the Commissioners contend that the Appellant has made returns required under VATA 1994, but that such returns are incorrect, so that they are entitled to assess the amount of VAT due from the Appellant to the best of their judgement.

We also need to refer to certain provisions relating to the time limits within which the Commissioners are required to make assessments if those assessments are to be valid. Section 73(6) VATA 1994 provides:

An assessment under subsection (1) … above of an amount of VAT due for any prescribed accounting period must be made within the time limits provided for in section 77 and shall not be made after the later of the following –

(a) 2 years after the end of the prescribed accounting period; or

(b) one year after the evidence of facts, sufficient in the opinion of the Commissioners to justify the making of the assessment, comes to their knowledge….

Section 77(1) VATA 1994 also makes provision as to time limits in the case of an assessment under section 73 VATA 1994, as follows: