First-tier Tribunal (Tax)

[2010] UKFTT 357 (TC)

Appeal number: LON/2009/0621

VALUED ADDED TAX – assessment in respect of under-declared tax – whether proper records kept – no – whether assessment to the best of the officer’s judgment – yes – appeal dismissed

FIRST-TIER TRIBUNAL

TAX

NABILTECH UK LIMITED Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents

TRIBUNAL: Malcolm Gammie CBE QC (TRIBUNAL JUDGE) Michael Bell

Sitting in public at 45 Bedford Square, London WC1 on 31 March 2010

Mr Amar Hamid (Director) assisted by Mr Mohammed Busawon (Accountant) for the Appellant

Mr Jonathan Holl (Advocate) for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.       This is an appeal by Nabiltech UK Limited against an assessment in respect of underdeclared VAT of £7,337.61

2.       We heard evidence from Mr Martin Evans, one of the Respondents’ officers, and Mr Amar Hamid, one of the Appellant’s directors, who also presented the Appellant’s case with the assistance of his accountant, Mr Mohammed Busawon.

The Facts

3.       Based on the evidence that we heard and the documents put before us, we find the following facts.

4.       The Appellant was incorporated on 17 January 2005 and was first registered for VAT with effect from 1 February 2006.  The Appellant’s business was described as that of the retail sale of computers, computer accessories and components, computer upgrades and repairs.  A VAT return covering the period from 1 February 2006 to 31 August 2006 (period 08/06) was issued to the Appellant and the completed VAT 100 form was submitted on 27 October 2006.  The 08/06 return showed output tax of £8,029.81 and input tax of £9,717.34, leading to net VAT reclaimed of £1,687.53.

5.       Following receipt of the 08/06 return, Mr Evans and another of the Respondents’ officers visited the Appellant’s premises.  The purpose of the visit was to investigate any risks arising from potential MTIC fraud.  In the course of his visit Mr Evans formed the view that the standard of record keeping appeared to be unsatisfactory.  He accordingly uplifted the available business records for copying and detailed examination.

6.       The records uplifted on that occasion and information provided by the Appellant’s accountant on a subsequent visit indicated that there had been total sales of £112,987.75 between February 2005 and January 2006.  As a result Mr Evans concluded that the Appellant’s date of registration was incorrect and it was duly corrected to 1 November 2005.  A VAT return for the period 1 November 2005 to 31 January 2006 was issued on 11 December 2006 and submitted by the Appellant on or around 5 February 2007.  This showed output tax of £3,590.49 and input tax of £5,590.49, leading to net VAT reclaimed of £1,798.12.

7.       The basis of the available sales record was a series of pre-printed and numbered invoice pads.  Mr Evans’ review included an examination of schedules listing the recorded sales in the period from February 2006 to August 2006.  The schedules listed the invoice number, the net, VAT and gross value of each sale.  No schedule was supplied for February 2006.  For March 2006 the invoice numbers run from 0501 to 0550 and for April from 0551 to 0600.  In this respect it appeared somewhat surprising that each month should have involved the issue of exactly 50 invoices.  Later months record well in excess of that number of invoices.  No schedule was supplied for May 2006.  In June 2006 the first invoice is numbered 2101 and the sequence for the month runs to 2207.  The July schedule continues with invoice 2208 and runs to 2300 before going back to 0601 and ending the month with 0660.  The schedule for August 2006 continues with invoice 0661 running on to 0700 before continuing with invoice 1901 and then up to 2000 before starting again with invoice 2459.

8.       The breaks in the sequence of invoices might be explained by the failure on completing one pad of pre-printed and numbered invoices to select the next sequential pad.  It suggests at the very least, however, a rather random approach to the business’ record keeping.  None of the schedules record the dates of sale, description of goods sold or the method of payment.  No sales invoice pads were available for inspection covering the period prior to September 2006. 

9.       More detail was, however, available for sales in October 2006.  In this case a schedule lists dates, invoice numbers, a description of the goods sold, the gross sales amount and whether the sale involved cash or a credit card.  The schedule continues to illustrate the random selection of numbered invoice pads.  The earliest invoice listed is 1723 running to 1800 and then continuing with 1601 to 1603 before restarting with 1501 running to 1536 and then continuing with 1628.  In later correspondence and at the hearing, the Appellant suggested that this listing could not be relied upon as being prepared “by a couple of school boys who were keen to experiment their spreadsheet skill”.  We do not accept that explanation and see no reason why the October 2006 listing was not an accurate record of the Appellant’s sales for that month, even if the Appellant had demonstrated (and the Revenue had accepted) that the categorization of sales as cash or card was not wholly accurate.

The adjustments proposed by Mr Evans

10.    Following his visits to the Appellant’s premises and his meeting with the Appellant’s accountant, Mr Evans wrote to the Appellant on 11 December 2006 to notify it of its failure to register in time and requiring it to provide a return for the period beginning on 1 November 2005.  Mr Evans then wrote on 14 December 2006 informing the Appellant of the results of his analysis of the Appellant’s records.  He noted that one of the Appellant’s bank accounts showed credit and debit card deposits for March, April and August 2006 which exceeded the gross sales declared in the VAT returns for those months.  Another account included deposits that could not be traced.  Mr Evans also referred to a manuscript record for the first week of March that appeared to list cash and credit or debit card takings for that period.  The figures for the week totaled £3,555.10 as against a total sales figure on the invoice schedule for March 2006 of £3,657.67.  From this Mr Evans concluded that the Appellant’s sales were significantly higher than those recorded in the Appellant’s VAT return.

11.    Based on the material available to him, Mr Evans concluded that for every £1 of credit or debit card sales approximately £2.52 would be taken in cash.  Having regard to the available record of credit and debit card sales paid into the Appellant’s bank account, Mr Evans calculated that the true overall takings of the business was likely to be closer to £170,000 for the period 08/06.  This figure also corresponded to estimated turnover figures that the Appellant had entered on certain bank and trading applications that it had made.  Accordingly, Mr Evans adjusted the net VAT for the period 08/06 from a repayment of £1,687.53 to a payment of £8,669.33. 

12.    Subsequently, on 6 February 2007 Mr Evans wrote again to the Appellant correcting the calculation of the adjusted net tax figure to show net tax payable of £16,699.14 (which figure also included an adjustment for incorrectly claimed input tax in 08/06).  Mr Evans indicated this amount was assessed as tax due.

The Appellant’s objections to the adjustments

13.    Mr Evans received no reply to his letters of 14 December 2006 and 6 February 2007 until the Appellant’s accountant wrote to the Respondents’ debt management unit on 19 November 2007, enclosing two letters dated 12 February and 23 April 2007 which the accountant said had been posted but which had evidently never been received by the Revenue.  The letter dated 12 February 2007 contained the Appellant’s response to Mr Evans’ calculations.  It accepted that the input tax adjustment was correctly made but objected to the method that Mr Evans had used to calculate the output tax adjustment. 

14.    Those objections, which were essentially repeated at the hearing, contained a number of different strands: (1) first, the origin and accuracy of the manuscript figures for the first week of March were questioned; (2) the use of one week’s figures from which to extrapolate figures for the whole 08/06 period was said to be unreasonable; (3) this was said to produce an unreasonably high cash to card sales ratio and it was suggested that the true ratio should 75% card sales and 25% cash; (4) furthermore there was no evidence of stock purchases to match that level of under-declared sales; and (5) the figures suggested a far higher gross profit margin than could be achieved in this type of business.

15.    In giving his evidence Mr Hamid indicated that in the period with which we are concerned in 2006 the Appellant has allowed a third party (whose name Mr Hamid was unable to recall) to use one of its card readers at certain weekend computer fairs, so that some of the recorded amounts for credit card sales might actually have represented sales by this third party and not by the Appellant.  Whether or not that is correct, it became clear in the course of Mr Hamid’s evidence that the Appellant in fact supplied the third party with the computer equipment that he was selling and that the value of any card sales that the third party made and which entered the Appellant’s account was applied by the Appellant in restocking this third party.  It seems to us, therefore, that this arrangement would have had no impact on the matter, the credit card sales in question still reflecting supplies that the Appellant had made in this period.

The revised adjustments made by Mr Evans

16.    The correspondence that followed the accountant’s letter of 12 February 2007 (which was only received by the Revenue in November 2007) eventually led to Mr Evans’s revising his calculation of the net tax due.  In particular, based on an analysis of the October 2006 sales receipts, adjusted for those transactions that were shown to be card rather than cash sales, Mr Evans derived a cash to card ratio of 121.92 per cent.  As a result, Mr Evans reduced the assessment from net tax payable of £16,699.14 to net tax payable of £7,337.61.

Our conclusion

17.    Based on the papers before us and the evidence that we heard, it is apparent to us that the Appellant has failed to make accurate returns and to keep the necessary documents and records to enable the Revenue to verify its returns.  The question that we then have to answer is whether the assessment that Mr Evans raised as a result was to the best of his judgment.  Mr Holl for the Respondents referred us in this respect to the principles enunciated by Dr Brice in Curry Inn Restaurant v The Commissioners of Customs & Excise (LON/97/834) at paragraph 42—

“From the decision in Van Boeckel we derive three principles. First, there must be some material before the Commissioners on which they can base their judgment. Secondly, the Commissioners are not required to do the work of the taxpayer in order to form a conclusion as to the amount of tax due. Thirdly, the Commissioners are required to exercise their powers in such a way that they make a value judgment on the material which is before them. From the decision in Rahman we derive three more principles. Fourthly, the tribunal should not treat an assessment as invalid merely because it disagrees as to how the judgment should have been exercised; a much stronger finding is required; for example, that the assessment had been reached ‘dishonestly or vindictively or capriciously’; or is a ‘spurious estimate or guess in which all elements of judgment are missing’; or is ‘wholly unreasonable’. Fifthly, if the assessment is shown to have been wholly unreasonable or not bona fide there would be sufficient grounds for setting it aside but that kind of case is likely to be extremely rare. Finally, in the normal case it should be assumed that Customs and Excise have made an honest and genuine attempt to reach a fair assessment; the debate before the tribunal should be concentrated on seeing whether the amount of the assessment should be sustained in the light of the material then available.”

18.    Having regard to those principles we find that Mr Evans’ calculations were based on relevant material and he put his calculations to the Appellant for its comments.  For whatever reason these were only forthcoming after some considerable delay but Mr Evans nevertheless considered them and in due course responded to them by reducing the assessment to take account of the Appellant’s further submission.  To the extent that the Appellant continued to criticize the basis of Mr Evans’ calculations and his reliance on the October sales listing we consider that those criticisms are without foundation having regard to the information that was available to him.  Mr Evans made a value judgment on the information which he had and performed his function honestly and bona fide. He fairly considered all the information and came to a decision which was reasonable and not arbitrary as to the amount of tax due. He made an honest and genuine attempt to reach a fair assessment. Having regard to the downward adjustment that Mr Evans made to his original assessment we do not believe that the final assessment of £7,337.61 can in any way be described as excessive.

19.    We therefore dismiss the Appellant’s appeal.

20.    This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  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.

MALCOLM GAMMIE

TRIBUNAL JUDGE

RELEASE DATE: 30 July 2010