First-tier Tribunal (Tax)

[2009] UKFTT 344 (TC)

TC00285                      

 

   Appeal number : MAN/08/0251

 

VAT - s.73(1) VATA 1994 – failure to keep records – returns incomplete or incorrect – mark-up exercise – whether assessment made to best judgement – appeal dismissed

 

 

FIRST-TIER TRIBUNAL

 

TAX

 

 

 

                                               ROBERT WALSH                              Appellant

 

                                                                      - and -

 

                                 THE COMMISSIONERS FOR HER MAJESTY’S

                                            REVENUE AND CUSTOMS  (VAT)         Respondents

 

 

 

 

TRIBUNAL: Michael Connell (Judge)

 

Ann Christian (Member)

                                                                       

 

Sitting in public in Manchester on 22 October 2009

 

Mr Martin Chong for the Appellant

 

Mr B Haley on behalf of HM Revenue & Customs for the Respondents

 

 

 

© CROWN COPYRIGHT 2009

 

DECISION

 

1          This is an appeal by Robert Walsh (“the Appellant”) against a Notice of Assessment for VAT dated 25.01.06 pursuant to s.73 (1) Value Added Tax Act 1994.  The Notice was initially for the sum of £13,068.00 but, following revision by HMRC, has been reduced to £11,951.00 and relates to the quarterly tax periods from 01/2003 - 07/2005 inclusive.

 

2          The Appellant was represented by Mr Martin Chong and HMRC by Mr B Haley.  Oral evidence was given by the Appellant and his daughter, Joanne Walsh, and on behalf of the Respondents by officers of HMRC Mrs Clair Magill and Mr Martin Roberts. HMRC provided a bundle of documents including witness statements by Mrs Magill, Mr Roberts and officer of HMRC Mr Roger Cooper Murphy. No objection was taken to any of these documents and they were admitted in evidence.

 

3          The Appellant had carried on business as the sole proprietor of The Wharf Public House 111 Merton Road Bootle Merseyside (“the premises”) and had been registered for VAT from 28.02.98.

 

4          On 25.01.06 the Appellant was notified by the Respondents that an examination of his records had shown that there had been an under-declaration of sales in VAT returns for the periods in question.  The Respondents contend that the information they had led them to believe that the Appellant had been operating a second till at the premises and that there had been an under-declaration rate of 24%.  The percentage uplift applied by HMRC formed the basis of the VAT Notice of Assessment.

 

5          The Appellant had initially been routinely visited by HMRC in April 2002 when concerns were raised regarding the Appellant’s daily gross takings (“DGT”), record keeping, the retention of till rolls and other proper records.  At the time of the visit there were two tills in use.

 

6          For the period 04.2003 the Appellant’s returned yearly sales were uplifted at the suggestion of his accountants as they were considered to be inaccurate and too low.

 

7          In July 2003 there was a fire at the Appellant’s premises, when the Appellant says that he lost stock and that the two tills he had previously operated had been destroyed.  The premises were totally refurbished and, following that, the Appellant says he only used one till.

 

8          In February 2004 the Appellant’s accountants wrote to the Appellant to remind him of the requirement to keep ‘prime records’ to substantiate his sales and that they would require :

 

·       original till roles to support each record of DGT and ‘Z’ readings (sequential and individually numbered final total of sales run through the till) for each day

 

·       failing that, relevant paperwork and records

·       otherwise they would not be able to keep complete VAT returns/accounts on behalf of the Appellant. 

 

The background to the accountants’ letter was that the method of working between the Appellant and his accountants was that the Appellant would telephone through his takings in order that the accountant could complete the values for the Appellant’s VAT returns, which he would then sign and send off. 

 

In the Respondents’ opinion, the Appellant’s record keeping was poor and often inaccurate.

 

9          The Respondents were provided with verifiable information that the Appellant had been using two tills over the Christmas 2004 period.  For reasons unconnected with this appeal the Appellant had been called upon to substantiate the source of a significant amount of cash that he held and, in doing so, produced two till rolls from his business to substantiate the source of the cash.  One of the till rolls showed the figure of £5,664.79 for the week to 26.12.04 and the other showed a figure of £1,831.59 for the Friday, Saturday and Sunday of that week.  The £1,831.59 had not been included in the Appellant’s VAT declarations.  The Appellant says that he had not used two tills since the fire in July 2003 and that he had hired a till only for the Christmas 2004 period when it was likely to be needed over the busy weekend.

 

10        On 21.06.05 HMRC undertook a pre-arranged visit to the Appellant’s premises.  The appointment had been arranged on 09.05.05. Prior to the appointment, the Appellant had been asked to produce till rolls for the previous VAT quarters but, during the visit, said that these had been accidentally thrown out by staff.  The Appellant was unable to produce any information regarding sales from 01.05.05, saying that his records were at home. Only one till was in use.

 

11        The Appellant was asked to explain what records were in fact kept relating to his DGT.  He explained that either he or his staff cashed up at night and noted the figures on a sheet of paper.  He said that cash payments from the till were also recorded and added back in to arrive at the correct total.  He was unsure of his annual turnover but estimated that his weekly take was approximately £2,500.00.  He had no business or personal bank account and his beer bill was paid via the Post Office.  All other dealings were also in cash.  Spirits and other items were often purchased from Bargain Booze and other similar outlets but he had kept no invoices.

 

12        During the visit on 21.06.05 the Appellant produced a ‘Z’ reading from the till.  The grand total was £19,860.34.  The ‘Z’ reading on the till roll was not timed or dated and did not have a consecutive ‘Z’ reading number.  The Appellant explained that he did a ‘Z’ reading each night and a period ‘Z’ reading each week but these were not available.

 

13        With the Appellant’s agreement, the Appellant’s accountants provided HMRC with their working file.  HMRC were however unable to establish with any certainty from the information available how sales figures and hence VAT returns had been made up because for some periods there were no sales figures for which prime records were available and there were also missing purchase invoices. Telephone calls by the Appellant to his accountant appeared to be quarterly, but HMRC say they could not establish this with any certainty.

 

14        On 13.07.05 HMRC met the Appellant at a pre-arranged visit to his premises to clarify how he recorded his takings.  The Appellant said that sales figures were taken from the till rolls.  ‘Z’ readings were taken after each shift – so there were three per day (except on Sundays when there were two).  He said that the DGT ‘Z’ reading was also taken on a Wednesday each week but the readings were not retained after being recorded.  He said he maintained a blue Guildhall cashbook to record quarterly takings but did not keep all his till rolls to verify that the records were correct.

 

15        The Appellant appeared to have a low mark-up and profit margin and said that ‘happy hour’ was one reason for this. In respect of the missing purchase invoices, the Appellant was not able to identify the level of spirits he had bought from Bargain Booze and other outlets in the past but that he had started keeping receipts.  He provided details of his average weekly order from the brewery but said that often invoices and mail ‘goes astray’.  HMRC drew the Appellant’s attention to the fact that there were differences between the input tax figures declared on his VAT returns and the figures given to him by his accountant for the period 01/2005.  The Appellant was unable to explain these differences.

 

16        On 12.08.05 two officers of HMRC made an unannounced visit to the Appellant’s premises to return his records.  During the visit it was noticed that two tills were in use and both of them turned on and appeared to be in use.  The officers from HMRC asked whether Mr Walsh was present but were told by a female employee that he was not there and not due back for some time.

 

17        On 23.09.05 a second unannounced visit was made to the premises.  Again there were two tills both containing till rolls. The Appellant was not present and so the officers from HMRC spoke to him by telephone and asked if they could uplift the till roll from the second till for inspection.  The Appellant refused.  HMRC said that the Appellant had initially offered to return to the pub to assist HMRC’s enquiries but then changed his mind.

 

18        On 29.09.05 HMRC wrote to the Appellant saying that it had concluded that the DGT for 26.12.04 had not been correctly declared. The total on the till roll for the second till had not been included in the return for that period. On the basis that the Appellant had not been maintaining proper records to support his declared DGT despite reminders to do so by both HMRC and his accountant, HMRC were issuing a Notice of Assessment on the basis that the suppression of stated takings from the second till equated to 24%, representing the proportion which the takings for the second till of £1,831.59 bore to the total takings in respect of the main till and the second till of £7,496.38.  A schedule was sent setting out HMRC’s calculations for the period from 01/2003 - 07/2005. The Appellant was invited to respond and furnish any further information he considered relevant before a formal Assessment was issued.

 

19        No formal response was received from the Appellant and on 16.01.06 a Notice of Assessment in the sum of £13,075.00 was issued to the Appellant pursuant to s.73-77 VAT Act 1994.  Following that, there was an exchange of correspondence between HMRC and the Appellant’s accountants who requested a reconsideration of the assessment on the basis that, whilst two tills had indeed been in operation over the Christmas period of 2004, only one till was in operation for the duration of the remainder of the time covered by the assessment – ie from 01/2003 – 07/2005.  HMRC reviewed the history of the matter and noted in particular that HMRC officers had witnessed two tills, with till rolls in operation, on the premises during unannounced visits over a substantial period and that the Appellant had on one occasion refused an officer from HMRC permission to inspect the Appellant’s records behind the bar area and remove till rolls for inspection.  HMRC declined to review the assessment.

 

The Appellant lodged notice of appeal to the Tribunal Service.

 

20        At the hearing, in giving evidence to the Tribunal, the Appellant said that whilst there may have been two tills in 2002 and again during the Christmas period of 2004, there was no substantiated evidence that there had been two tills or undeclared takings for the remainder of the assessment period 01/2003 - 07/2005.

 

21        The Appellant said that whilst there were two tills on the premises during the two unarranged visits and possibly on other occasions this did not necessarily mean that the tills were in use. The second till had been there to cater for potentially busy weekends when the Appellant may have been preparing to show satellite football on the premises’ TV.

 

22        Mr Chong on behalf of the Appellant said there was no legal requirement to keep till rolls for each and every quarter for an indefinite period. He said that the Appellant had kept a blue Guildhall book in which he recorded all his quarterly takings and which the Appellant quite willingly gave to HMRC officers on the occasion of their visit on 13.07.05. Mr Chong says the Appellant would have been willing to answer any queries that HMRC had, but none were raised at the time.

 

23        The Appellant said that The Wharf PH was a small pub and did not warrant the use of two tills, although he conceded that he was unable to explain why the tills were there, switched on and apparently ready for use if there was no need for the tills except during infrequent but exceptionally busy periods.

 

24        The Appellant explained that he had not wished to allow HMRC to go behind his bar and inspect the till roll in the second till on 23.09.05 because he was unhappy that HMRC’s visit had not been prearranged by agreement with him.

 

25        The Appellant said that he did not keep till rolls because he did not know that he had to. He conceded that he was “hopeless” at bookkeeping.

 

26        The issue before the Tribunal was firstly whether or not the Appellant had maintained proper records in order to verify his VAT returns and secondly, if not, whether the VAT assessment had been properly made to “the best of their judgment” by HMRC. The onus is on the Appellant to show that it was not so made if the Appellant is to succeed.

 

27        The Tribunal carefully considered all the evidence and the relevant principles of law.

 

28        Section 73(1) of the Value Added Tax Act 1994 provides that :

 

“where a person has failed to make any Returns 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 judgment and notify to him”.

 

29        It was quite evident that the Appellant had not been keeping complete and proper records and that he had not afforded HMRC the facilities necessary to verify his VAT returns.  By his own admission, his bookkeeping and the methodology by which he maintained records was inadequate.  There was evidence that a second till had been in use, that some sales had not been recorded and that consequently there had been an under-declaration for VAT purposes.  On a balance of probability, the Appellant had not proven to the satisfaction of the Tribunal that his VAT returns were correct.  HMRC were therefore entitled to raise an assessment.

 

30        The Tribunal therefore had to consider whether the assessment was raised to the best judgement of HMRC.  Again, the onus is on the Appellant to show that it was not so made if he is to succeed.

 

31        In considering this issue, the relevant criteria to be considered is laid down in established case law.  For an Appellant to show that an assessment has not been made to best judgement, he must show that the assessment is wrong in a material respect and that the mistake was such that the only inference is that the assessment was arbitrary, dishonest, vindictive or capricious, or based on a spurious estimate or guess, or is wholly unreasonable – see Van Boeckel v The Commissions of Customs & Excise (1980) 1BVC378 and Rahman v The Commissions of Customs & Excise (1998) SCT826.  There is no objective standard of reasonableness against which the assumptions made by HMRC have to be measured.  HMRC need only consider the information available and arrive at a decision which is reasonable and not arbitrary.  As long as there is some material on which HMRC can reasonably act then it is not required to carry out investigations which may or may not result in further material being placed before it.

 

In Spillane (1998) 3BVC1, 417, it was held that the Tribunal was justified in finding that the VAT officer who made the assessment when faced with difficulties in getting information relating to the Appellant’s business was entitled, when making an assessment to best judgement, to use figures towards the higher end of a possible range and that the burden of proof would be upon the Appellant to establish that this was incorrect.  To do so, the Appellant would have to show that there had been a conscious or irrational failure to place a reasonable interpretation on the available evidence.  

 

32        From an examination of the Appellant’s records, HMRC had calculated that the suppression of takings from the second till equated to 24%, calculated as follows :

 

total takings from the 2 tills -  £5,664.79 + £1,831.59 = £7,496.38.  The sum of £1,831.59 expressed as a percentage of the total figure of £7,496.38 was 24.43% - ie 24% when rounded down.

 

Before the assessment was made the Appellant was offered the opportunity of considering the calculations, furnishing any further information he considered relevant and commenting upon the method adopted in arriving at the 24% proposed mark-up.  Nothing was forthcoming and the Appellant provided no rational explanation or alternative calculations.  He did not concede for example that a second till had been in operation for only part of the period under assessment.  The Appellant, through his accountant merely stated that the assessment was incorrect because two tills had been operated only over the Christmas 2004 period.

 

33        The Tribunal consider that the Appellant has not discharged the burden upon him to show that HMRC was not entitled to raise an assessment or that the assessment had not been calculated to best judgement.  He has not supplied any information, documentation or material to enable the Tribunal to conclude that the assessment should not be sustained or should be reduced. 

 

  34      The Tribunal considers that the HMRC officer undertook all reasonable investigations and offered the Appellant the opportunity of responding before making the assessment.  The officer made a bona fide judgement on the information available and the percentage mark-up applied by the officer was reasonable, not arbitrary and assessed to best judgement.

 

35        Taking all the evidence into account, the Tribunal finds that the Commissioners, in making their assessment, had made the assessment to the best of their judgement and, for the above reasons, the Tribunal dismisses the Appellant’s appeal.

 

The Appellant has a right to apply for permission to appeal against this decision pursuant to Rule 39 of The Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.  The parties are referred to ‘Guidance to Accompany a Decision from the First-tier Tribunal (Tax Chamber)’ which accompanies and forms part of this Decision Notice.

 

 

MAN/2008/0251

 

 

 

 

TRIBUNAL JUDGE

RELEASE DATE 3 December 2009