Mrs Agnes Nelson t/a Sandvale Licenced Grocers v Revenue & Customs [2012] UKFTT 551 (TC) (29 August 2012)
[2012] UKFTT 551 (TC)
TC02228
Appeal number:
TC/2011/07933
INCOME
TAX – Concurrent VAT Investigation – whether understated trading profits –
whether accounting records accurate – whether recalculations using a business
economics model accurate – whether penalties justified. Appeal dismissed.
FIRST-TIER TRIBUNAL
TAX CHAMBER
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MRS AGNES NELSON
t/a SANDVALE
LICENSED GROCERS
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Appellant
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- and -
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THE
COMMISSIONERS FOR HER MAJESTY’S
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Respondents
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REVENUE &
CUSTOMS
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TRIBUNAL:
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JUDGE W RUTHVEN GEMMELL, WS
IAN M P CONDIE, CA
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Sitting in public at George
House, 126 George Street, Edinburgh on 15 and 16 August 2012
Mr William Watson for the
Appellant
Ms Ros Shields, instructed by
the General Counsel and Solicitor to HM Revenue and Customs, for the
Respondents
© CROWN COPYRIGHT
2012
DECISION
Introduction
1. This is an
Appeal by Mrs Agnes Nelson trading as Sandvale Licensed Grocers (“AN”) against
further assessments and penalty determinations for the tax years 2004-2005 to
2008-2009 inclusive, issued by HM Customs and Revenue (“HMRC”). The total
amount of tax and penalties appealed is £62,968.34.
2. HMRC state
that the profits are understated and raised assessments based on the profits
they believe were earned. The penalties were incurred for failing to take
reasonable care in maintaining records and negligently submitting incorrect
returns.
3. Evidence
was given by AN, Miss Karenanne McCleneghen (“KMC”), an employee of William Watson
& Co Accountants Limited (“WW”) and W H Cunningham (“WHC”) and Mr B Hadley (“BH”)
both employees of HMRC.
4. The
fundamental issue relates to whether the entries contained in AN’s self
assessment returns were correct and supported by appropriate records or whether
the findings and recalculations carried out by HMRC, using a business economics
model, reflect more accurate figures. This matter extended over five years.
Legislation
Taxes Management Act 1970
Section12B
Records to be kept for purposes of
returns
[(1)
Any person who may be required by a notice under section 8, 8A. … or 12AA
of this Act … to make and deliver a return for a year of assessment or other
period shall—
(a)
keep all such records as may be requisite for the purpose of enabling him to
make and deliver a correct and complete return for the year or period; and
(b)
preserve those records until the end of the relevant day, that is to say, the
day mentioned in subsection (2) below or, where a return is required by a
notice given on or before that day, whichever of that day and the following is
the latest, namely—
(i)
where enquiries into the return … are made by an officer of the Board, the day
on which, by virtue of section [28A(1) or 28B(1)] of this Act, those enquiries
are … completed; and
(ii)
where no enquiries into the return … are so made, the day on which such an
officer no longer has power to make such enquiries]
(2)
The day referred to in subsection (1) above is—
(a)
in the case of a person carrying on a trade, profession or business alone or in
partnership or a company, the fifth anniversary of the 31st January next
following the year of assessment or (as the case may be) the sixth anniversary
of the end of the period;
(b)
[otherwise], the first anniversary of the 31st January next following the year
of assessment ...
[or
(in either case) such earlier day as may be specified in writing by the
Commissioners for Her Majesty's Revenue and Customs (and different days may be
specified for different cases)].
The Facts
5. AN has
traded as Sandvale Licensed Grocers since 1 November 2000 in Airdrie in Lanarkshire. Photographs of the shop and its location and details of a number of
other and often competing businesses, were shown on maps submitted to the
Tribunal. AN had previously been in partnership with her mother for a number of
years before she commenced as a sole trader.
6. In the tax
year 2005-06, based on the accounts to 31 October 2005, the gross profit was 4.37% and in the previous four years had been 6.4%, 9.1%, 4.5% and 6%.
7. An enquiry
was started by HMRC on 24 October 2007 and on the same date a letter was sent
to Watson Macarthur & Co, AN’s then tax advisers.
8. A Notice
under Section 9A(1) of the Taxes Management Act 1970 was served requesting,
amongst others, a copy of the full accounts of the business covering the year
ended 31 October 2005 and asking whether a figure was needed to balance the
accounts and, if so, how much and how this was treated. In addition, the tax advisers
were asked to provide a full analysis of drawings from the business to show
cash, cheques and other items and to show how the figure of sales was arrived
at.
9. An issue
was raised as to whether the letters were sent to the correct address but a
further letter was sent to AN on 26 November 2007 asking for, amongst other
information, the items referred to in the letter of 24 October 2007.
10. No response appears to have
been received and a further letter was sent by HMRC on 22 January 2008
containing a final warning that following an initial penalty of £50, further
penalties up to £150 for each day, would continue if the failure to comply with
the notice continued, and which would take effect 14 days later.
11. On 19 February 2008, AN was sent a penalty notice for £50 and on 26 February 2008 WW sent the books and records to HMRC which were hand delivered to their Motherwell
office.
12. An undated letter, but
received by HMRC at an Edinburgh office, was received on 3 April 2008 enclosing
lead schedules and, at that date, HMRC said that the only documents they had
received were four quarterly folders enclosing till rolls, receipts, cash
expenditure and sales listings, on a weekly basis, and cash and carry computer
listings.
13. On 10 April 2008, a Section 97A(1)(b) Taxes Management Act 1970 Notice was served requiring further
information and on the same date AN was sent a penalty notice for the period 28 February 2008 to 9 April 2008.
14. On 16 April 2008, WW lodged an appeal on the grounds that HMRC had a copy of the accounts and related
lead schedules and bank statements. The Appeal was acknowledged by HMRC on 29 April 2008, and at the same time a note of the documents and information still
outstanding was provided which included mention of a balancing figure allocated
to sales of £15,480.
15. This letter requested the
analysis of drawings which had not been provided, the cheque and pay-in book
stubs and stated that business bank account statements had been received with
the letter of 16 April 2008 and noted a balancing cash figure of £18,189.37
which had been treated as fully arising from standard rated sales and that 25% of
sales were zero rated and should be reflected in the adjustments to sales.
16. HMRC sent mandates in order
for them to contact AN’s four main suppliers and a meeting was arranged between
AN, WW and HMRC on 23 May 2008 but which then took place on 17 June 2008. WHC was present for HMRC.
17. At this meeting, private and
personal information was given about AN, stating that she owned a house on
which there was an endowment mortgage of £36,000; that it would be helpful if
AN’s husband, although not part of the enquiry, provided information and made
reference to the house next door for which they were making payments to the
neighbour.
18. It was stated that AN had
received or retained legacies worth approximately £30,500. At least £18,000 of
this amount was retained in cash in the house.
19. There was discussion of a
holiday to America which was taken in July 2005. It had been booked a year
before travelling with half the cost paid in cash and the remainder by credit
card. AN's credit card had a limit of £2,000 to £2,500.
20. The licensing hours of
Sandvale Licensed Grocers were 8am until 10pm but AN normally opened at 9am having passed Booker Cash & Carry on the way to collect supplies of cigarettes and
small spirits. Bulk orders were placed on Wednesdays for delivery on Thursdays
and all purchases were paid for in cash. Another cash and carry, Davidsons, was
used for alcohol and confectionery and they held an account which AN made
payments towards every second day from takings.
21. Various members of AN’s
family helped in the shop on an unpaid basis and as there was limited storage
space at the shop regular cash and carry visits were necessary. The most popular
items sold were Mayfair, Richmond KS and Regal cigarettes, beer, bread, milk
and ten pence crisps.
22. AN stated that chemist goods
which were expensive to buy in had a mark up of 25% to 30% and alcohol had a mark-up
of 8% to 10%. For Booker supplies, AN used the recommended retail price but Davidsons
goods were often pre marked with a price at which the goods were sold.
23. Although there was
competition in the area and prices were often changing, AN confirmed at the
meeting that there had been no change to her pricing policy for the last ten
years and that margins were approximately the same.
24. There had been a break in to
the property which caused a great deal of damage and, in addition, there was
also natural wastage through the expiry of sell by dates and there had been
shoplifting. The shop had a Pay Point system and cash for this was kept separate
from other sales and banked at least every second day. Pay Point’s payments
were paid to them by direct debit.
25. A physical count of cash was
made each night and a daily record kept and weekly cash sheets were prepared at
home once a month. AN said that all sales were put through, and cash placed in,
the till; that she never withdrew business cash from the bank but took weekly
drawings which ranged between £100 and £200 per week in cash. No record of
drawings taken was kept. Approximately £7,600 was attributed to own goods taken
from the shop and stock figures were estimated as no stock takes were carried
out.
26. At the meeting WHC stated he
had concerns over the £18,000 balancing figure because there was no record of
drawings and was unhappy with the gross profit rate which he considered to be
low, at less than 5%.
27. As he noted the pricing
policy had not changed over the years, he, therefore, stated his intention to
look at the current prices when he visited the shop with a view to comparing
this with recent purchase prices. A note of this meeting was sent to WW
requesting in writing any amendments. None were received.
28. A further request for
information was made on 24 June 2008, to be received by 31 July 2008. It was not received and a Section 19A Notice was issued on 4 August 2008. On 19 September 2008, a further notice was sent having received no response to the
24 June 2008 letter and a penalty notice in respect of this was sent, followed
on 21 October 2008, by a penalty determination for the year 2005-2006 for £50.
29. On 27 October 2008, WW responded
to the letter of 24 June 2008 enclosing a means test which showed a positive balance
at the year end, noting that although there was no statutory requirement to
produce this data, it showed that drawings substantiated AN’s lifestyle. WW
advised that AN was unwilling to allow HMRC to approach the suppliers to
request the information because she was trading in difficult circumstances.
30. At the Tribunal hearing the
means test statement was discussed and it became clear that within the income total
figure, the contributions from “Sandvale” was unclear. As AN stated that this
was comprised of a private share of motor car expenses and “own goods”, there
seemed to be no inclusion of the £200 per week which AN had admitted at the
Tribunal hearing to taking out as cash drawings.
31. A large item of expenditure
related to the American holiday at a cost of £6,500. As the credit card limit
for AN was £2,500 it was unclear how this payment of £6,500, which was the
total cost of the holiday, could be relevant to the year 2005 when half had
been paid in cash in 2004 nor how the balance was paid by AN’s credit card.
32. It was established that the means
statement was neither a cash statement nor a statement based on the accruals
accounting concept but was instead a hybrid which made it difficult to
understand but, on the face of it, it seemed that the income did not cover the
amount of the expenditure and, accordingly, there was not a surplus balance but
a negative one.
33. On 28 October 2008, HMRC
wrote to WW stating they did not believe that AN’s records were robust; that
they were incomplete because a figure in excess of £15,000 had been credited to
sales to balance the accounts; no record had been maintained of AN’s drawings
and that the gross profit rate returned, at less than 5%, was substantially
lower than would be expected for the type of shop involved and below that which
would be expected from the mark up rates indicated by AN. A request was made
for three month’s worth of purchase invoices ending 31 July 2008 in order to carry out an exercise which WW considered to be a “fishing exercise”.
34. On the same day a letter was
sent from WW appealing against the notice of 21 October on the grounds
that AN was not in a “stable stress free relationship” as AN said she was in a
state of fear and alarm in relation to HMRC obtaining information regarding her
husband’s tax affairs, that her marriage was under great strain and that she
had various personal health issues which precluded her from acting in a timeous
manner.
35. On 30 October 2008, HMRC advised that they had not been aware of Mr and Mrs Nelson’s relationship
problems and that, although the bank statements were one of the documents requested,
there were a further six other items which remained outstanding. At the
hearing it was acknowledged that in fact there were five items outstanding at
the date.
36. On 4 November 2008, WW handed in a VAT folder covering the quarter to July 2008 to the Motherwell
Tax Office. On 12 January 2009. WHC sent his calculations of the gross profit
ratio based on the purchase invoices from May to July 2008 in conjunction
with the prices obtained from a visit to the shop on 20 June 2008. HMRC felt that grocery items appeared to be sold at the manufacturer's
recommended retail price but that some could be sold at higher mark up rates
providing an unweighted mark up of 37.8%, tobacco items providing a mark up of
just over 7% and alcohol sales of 23.6%.
37. The purchase mix was
ascertained at 39.49% for tobacco, 32.54% for alcohol and 27.97% for other
sales. HMRC concluded that they were expecting an overall mark up of 21% or a
gross percentage ratio of 17% - much higher than the 4.36%.
38. A Commissioners Hearing took
place on 22 January 2009 in relation to a £50 fixed penalty. The appeal was
dismissed by the Commissioners. After further correspondence, stencils were sent
by HMRC on 9 March 2009 and further information requested.
39. At this stage, mention had
been made of a theft in WW's letter of 6 March 2009. Further details of the theft were requested including the name of the employee concerned, the period
employed, the period over which the thefts occurred, the amounts and how these
were uncovered and further evidence in support by way of police reports,
lawyers letters etc.
40. A meeting took place on 16 March 2009 between AN, Mr Findlay of WW and WHC at which the bank accounts’ stencil
could not be completed because AN could not remember her account number but the
mandates for the suppliers were completed. No further information could be
supplied regarding funds from and repaid to AN’s mother.
41. AN said she had suffered a
breakdown around February/March 2005 and had found it difficult to work in the
shop for a period of 18 months. During this period she had had the help of a
friend who became more involved in the shop during AN’s illness. She basically
ran the shop. AN indicated that she would do most of the ordering of the stock
but the friend would also order more stock.
42. AN would not give HMRC details
of the friend who had been stealing stock from the shop and it was estimated that
approximately £10,000 worth of sales had been involved. AN would not involve
the police because of her concern for the friend and her family and, in evidence,
AN confirmed that the friend was in a responsible job that she would otherwise
lose.
43. Neither the friend nor any
member of the family received any payment for their help given in the shop and AN
had only become aware of a problem when she was told by customers that stock
was being removed and that sales were not being recorded through the till. AN
also became suspicious when Davidsons’ bills increased noticeably and AN discovered
that the friend was adding orders on to AN’s own stock orders and then stealing
the goods.
44. WHC said that there was no corroboration
of the thefts but AN said she would not supply any details.
45. Further discussion took
place in relation to pricing policy and although AN stated that she would be
able to give only limited information of the pricing policy in the year because
of her health problems and she was unsure if the prices had changed at all.
46. On 26 March 2009 a note of this meeting was sent asking for intimation of any disagreements with its
content. None were received. Further independent verification of AN’s illness
was requested. This was not received. WW stated that they were reticent in
asking AN to obtain information from her GP regarding her health as it might
cause her more distress “not to mention the costs incurred in such a request”.
47. On 31 March 2009, WW stated that it was difficult to calculate the cost of the theft caused by a
mixture of stock and cash that had been misappropriated but an explanation was
made that the theft of two cartons of cigarettes a week for £50, groceries of
£75 and cash of £125 would support the missing amount.
48. On 7 July 2009, HMRC wrote
to WW stating that having reviewed the records from Davidsons the pattern of
purchases, assuming an annualised figure for the period ended 31 October was
correct and was very similar to the years ended 31 October 2007 and enclosed
a revised sales analysis based on a sample for three months and calculated a
mark up rate before wastage and theft of 17.5% and a gross profit margin of
14.88%.
49. On 15 July 2009, WW responded that he fundamentally disagreed with the calculation and said that the purchase
figure for the year in question should have been reduced by £15,479 as opposed
to sales being increased by this amount. Furthermore, WW stated that the
period of trade taken for this exercise did not reflect profitability of the
business during the year in question.
50. At this stage, an enquiry in
to the VAT returns of Sandvale Licensed Grocers was issued and the books and
records were received by HMRC on 26 February 2010. Consequently, BH of HMRC became involved and a further meeting took place on 11 May 2010 which was primarily to discuss VAT issues. Both WHC and BH were present as were WW
and AN.
51. The note of this meeting was
confirmed by BH in examination and cross examination.
52. Comments on the meeting note
were sent by letter of 22 July 2010 by WW to BH and on 23 July 2010, WW wrote
to HMRC stating that they believed the records to 31 October 2005 to be robust
and that it was standard procedure, when dealing with single entry accounts
preparation to deal with any cash differences, to credit sales if the balance is
in credit and debit personal drawings if the balance is in debit. Accordingly,
there was no loss to HMRC.
53. BH gave evidence to say that
he had visited Sandvale Licensed Grocers, primarily with a view to checking the
till and that this had proved to be satisfactory as regards programming and
that he had found nothing contentious. His major concern was that the till
audit rolls had been kept for only three months and then destroyed and, on 28 July 2010, AN was reminded that she was required by law to keep these for six
years.
54. On 21 October 2010, HMRC
wrote to AN with a business model, which allowing for a 5% wastage rate in
calculating the mark up rates used by HMRC, provided a gross profit ratio of
12.75% and an overall mark up of 14.61%. An explanation of the mark up rates
was provided. This was then translated into a revised “profit build up account”
for the year ended 31 October 2005 and resulted in an adjusted additional
profit rounded to £32,000. This process was then applied to the other years
including the tax year 2007-2008 which covered a 17 month period and resulted
in additional profits for the tax year 2004-2005 of £30,000, 2005-2006 of
£32,000, 2006-2007 of £32,000, 2007-2008 of £42,500 and 2008-2009 of £28,000. This
produced additional duties of £47,697.15.
55. On 15 November 2010, having
made complaints about the delay in receiving documents from HMRC, WW responded
that the business model failed to take account of VAT on the sales margin, that
there were no ghost sales and that HMRC were happy with the till system.
Consequently, WW said that the business model contained fundamental errors.
56. On 16 November 2010, HMRC
responded stating the business exercise marked up net of VAT purchases and, as
such, arrived at a figure of sales net of VAT; that they accepted that no
suppression of purchases had been found in respect of suppliers contacted and
that this was not the basis of concerns over recorded sales and confirmed that the
HMRC VAT visit, although happy with the till system, did not provide
satisfaction that all sales had been fully recorded through the till.
57. An appeal was intimated on 17 November 2010.
58. The results of an independent
review were issued by HMRC on 16 September 2011 and concluded that
AN’s rate of gross profit was not credible and that HMRC’s compiled figures
which calculated a gross profit in the region of 12.75% were correct; that
AN’s records had not been based on a robust bookkeeping system and were, therefore,
incomplete and her tax return was, therefore, incorrect.
59. The review was founded on
AN’s statement that the business practice had not changed for ten years so, in
the general presumption of continuity, WHC had used his findings to look at
other returns and had based his adjustments on what he found.
60. KMC who had worked for WW
for four years gave evidence setting out her duties and explaining how the VAT returns,
till rolls and daily sheets were utilised.
61. One of these important sheets
was entitled “Paid in Cash”. It became evident throughout the Hearing that these
payments were not all cash because Davidsons Cash & Carry amounts appearing
in the list were purchased by means of a credit account and that cash payments
were made to Davidsons’ every other day from the till. These were itemised
under the “Paid into Bank” part of the daily sheet.
62. In addition to the Pay Point
system, it was explained that during the period of the assessments under Appeal,
a lottery machine was installed which had a beneficial effect on sales.
63. Evidence was led in relation
to a report on gross margin prepared by WW stating “since the client records
all sales from the ‘z total’ on the till, if we secure the purchase invoices then
we can report the gross margin achieved. If we accept that there will be no
material movement in stock held then the results are easily conclusive”.
64. The report used the sample
period 1 November to 21 November 2010 and referred to a listing of 811 sales
detailing every purchase invoice that was presented in the period, with each item
attributed a net and a gross price and, where appropriate the “flashed” price,
ie the price printed on the side of the packaging to be paid for by the retail
customer. All costs of sales and overhead items were included in the
spreadsheet.
65. Accompanying this was a
further spreadsheet “GM1” being a listing of 665 sales which had been reviewed
by AN to confirm the actual price achieved but excluding overhead items and cleaning.
66. The GM1 sales report showed
the sales for the same period with the gross margin percentage mark up on the
selling price. A GM2 report showed the overall gross margin percentage.
67. At the Tribunal hearing there
was considerable discussion about the GM1 report which produced a gross profit
margin of 9.94%. A further examination by the Tribunal of the figures in this
document showed that the total of the column headed ‘Profit’ of £150.90 should
be reduced by £11.50 in respect of the cost of blue recycled carrier bags,
which were not and never were intended to be items for resale.
68. WW accepted the validity of excluding
the aforementioned item and the effect of this exclusion resulted in a gross
profit margin of approximately 10.7% .
69. An analysis of the GM2
document, to confirm the percentage profit, set out a figure for sales from which
was deducted a figure for purchases, but these in turn had been increased by
adding 8% to the cost of purchases to represent wastage. The level of 8% which had
been provided by AN. WW believed this was a robust and correct calculation of a
percentage of stock going off or past its expiry date or shoplifted, and
produced a gross profit percentage of 9.50%.
70. The Tribunal questioned why
the wastages had been added to the purchases as the purchases were already
fully stated. The effect of adding estimated wastage to the purchases had the
effect of underestimating the gross profit margin. Also, following through the
calculation of the purchases figures, there seemed to be no account taken of
the own goods which had been admitted by AN were taken on a regular basis. If,
as WW had stated, there was no stock movement, the cost of goods sold was
accordingly overstated.
71. The Tribunal concluded that
this was not a reliable piece of evidence and WW stated that notwithstanding
that there may be some variances on the accounting treatment, the basic
position was that there had been considerable theft from the business and a break
in and WW maintained that the prices used were valid because the client had sat
in on the exercise.
72. On cross examination, HMRC said
that the exercise carried out in 2010 contained stock items that were not for
sale on 17 June 2008 which is the date the prices had been used in order to
recreate the 2006 prices based on the assertion by AN that the pricing policy
had not changed.
73. AN gave evidence and pointed
out that having been trading for over 32 years and having had two VAT visits, there
had been no request to change anything and no penalties had been payable.
74. AN was asked by WW if she or
her family had the means to pay £47,697 demanded by HMRC to which AN replied
that she did not and that if she had to pay she would lose everything. AN
stated the investigation had been going for six years and had caused her much
distress. Reference was made to the meeting of 17 June and AN confirmed that
her mortgage was still £36,000 and that she had endowment shortfalls with
policies with the Bank of Ireland and Standard Life.
75. AN also stated that no close
family members could help as her son was insolvent, that no other family
members were holding funds that could help and that AN had “no other funds”; that
the value of the stock in the shop was between £8,000 and £12,000 and that the
lease to the local council for the shop premises came to an end in the current
year, 2012.
76. When questioned by the
Tribunal as to the payments made to the neighbour in relation to the house
adjoining AN’s house, it was subsequently ascertained that AN owned the
adjoining house and it was mortgage free.
77. AN stated that she had suffered
from stress, marital breakdown and was receiving medication, primarily sleeping
pills, painkillers and anti-inflammatory drugs and that her relationship with
her husband had deteriorated as they were arguing over money.
78. AN said she did not wish to
report the friend who had allegedly stolen £10,000 worth of cash or stock. This
individual was named at the hearing but AN could not remember when she started
working.
79. AN described the considerable
competition from many grocery and licensed premises in the vicinity, the
refurbishment of competitors’ premises using family money, the options of her
shop as regard passing motor vehicle trade and visiting ice cream vans. AN considered
that, although having regular customers, pricing was key to retaining their
business.
80. WHC gave evidence and
confirmed his concerns about the cash adjustment and the level of profitability.
He had concerns about the amounts of cash, at least £18,000 retained in AN’s
house; the lack of any record of drawings; that the procedures followed were
standard for recreating a profit margin and an adjusted figure of profits.
81. He stated there was no evidence
that the friend had ever worked in the shop; there was no corroborating evidence
that the friend had stolen from the shop and expressed considerable surprise that
the matter had not been reported to the police.
82. WHC conceded that the amount
of wastage in a licensed grocers business with this mix of sales would be
difficult to quantify exactly but felt that 5% was a fair estimation and stated
that 40% of the purchases being cigarettes and alcohol attracted very little
wastage.
83. WW referred to what he believed
were the errors contained in WHC’s letter of 6 June, being items listed
but not analysed, where no dates were ordered and that there was no indication
of how the gross profit percentage was achieved.
84. In response, WHC stated that
he did not accept that there were major errors in the spreadsheet and it was,
in any event, amended but provided no material difference in result; that he
had carried out a 12 months exercise after WW had complained that a three month
exercise was an insufficiently long period for the sample.
85. WHC was asked to confirm the
prices shown in the photographs produced by AN but WHC stated he did not know
when the pictures were taken and that although the prices were higher than the
ones he had used he was confident that the prices used in 2008 were correct.
86. The Tribunal questioned WHC
as to whether he had asked if there were any unrecorded expenses and he
responded that he had asked this but not specifically about casual wages
because he had been told that no monies had been paid.
87. WHC stated that the drawings
analysis showed no cash drawings and, at the meetings with AN, confirmation had
been received that these ranged from zero to £200 per week for which there was
no record.
88. BH gave evidence to the reason
for the VAT enquiry and what took place as a result of that enquiry which
primarily was related to a two hour visit asking basic questions and checking
the till for programming.
89. It was stated that, as the
issues discovered by HMRC in relation to the income tax enquiry related to
carelessness and negligence, any reclaim of VAT was out of time in terms of the
VAT regulations.
90. Throughout AN’s evidence, WW
made reference to a number of external publications, being those produced by an
information provider, CCH, such as “the grocery trade”, “factors affecting
ratios” and “wastage”.
91. Reference was also made to
an HMRC publication which set out the basic records that are required to be
kept including a list of all sales and other income, a list of expenditure
including day to day expenses and equipment, a separate list for petty cash
expenditure of relevance, a record of goods taken for personal use and payments
to the business for these and back up documents for all the above.
92. During the hearing it was
suggested that no balance sheets had been drawn up but on the second day of the
hearing a balance sheet was produced for AN to 31 October 2006
showing the opening balances as at 30 October 2005. It was accepted this was
only a snapshot but the Tribunal had a number of concerns relating to this.
93. The opening figure of trade
creditors which it was ascertained related to the Davidsons Cash & Carry
seemed very similar to the closing figure, 12 months later and, indeed, was
slightly higher and, consequently, the Tribunal were unclear as to where the increased
totals, as a result of the theft, were reflected in these figures, particularly
the opening figure. WW said that the total had fluctuated throughout the year.
94. It was also unclear why the
item “Pay Point creditor” was contained within current assets and WW suggested
that this was an error and that it should have been offset against the VAT liability
but the relationship as to why this offset should take place remained unclear.
95. WW accepted that the balance
sheet might be incorrect.
AN’s Submissions
96. AN says that income and
expenditure are different from capital and referred to the great emphasis put
on unrecorded drawings by HMRC; that as drawings are not allowed for tax relief
there is no need to show them on tax returns and that drawings are not a capital
transaction and as there can be an abuse of the tax system, the only way to
stop it is to have bank reconciliations, test check the z readings from till
rolls for the whole year and carry out a cash reconciliation for the year in
the accounts.
97. AN says that if it is
assumed that all sales are on weekly cash sheets and cash expenses have been paid
out and bankings confirmed to the amounts lodged in the bank then any cash
balance in credit would suggest suppressed sales and any cash balance in debit would
suggest drawings taken by the client.
98. AN says that the amount of
drawings was confirmed by the client at various meetings including goods taken
for own consumption. On a strict basis, if these had been put through the
business accounts as purchases it would have secured relief which was not due.
99. AN says the term “uplift to
sales” can be emotive and that, if you reconcile a balance sheet , you should
have some comfort that all items on the balance sheet will be reflected through
an income expenditure account or a profit and loss account.
100. AN says she
offered to take part in a mediation exercise with HMRC in relation to a pilot
scheme, went to all the meetings and produced a means test although there was
no statutory requirement to do so.
101. AN says she had mental
health issues which were a significant factor and that advantage was taken of
her by her friend during a vulnerable period in her life and that the resulting
gross profit which was low was explained by the theft.
102. AN says that the
HMRC business economics exercises were refuted more than three times with
comparisons to actual prices and to photographs of stock; that the extensive evidence,
the CCH documents and confirmation the shop is not a high performing shop and
in an area with challenging and difficult trading conditions are relevant.
103. AN says that the
records are robust which is evidenced by HMRC’s acceptance that they have never
once found a z total not in agreement with the daily sheets and that the VAT inspection
of the till found nothing contentious; that z totals and slips are time
sensitive; and questions where the £32,000 is, if it has been received.
104. AN says that the
friend’s stealing appears “risky” but said that the friend was dismissed, that
the gross profit margin was reduced and that there was, at the time, no CCTV
evidence, that all statements have been made to the best of her ability and
honestly under oath and says the assessments are not robust because they are excessive
and, accordingly, that the Appeal should be allowed.
HMRC’s Submissions
105. HMRC say that the
records are incomplete; that the limited records that were produced provide no
information for the amounts of own goods, the amount of cash drawings,
creditors, opening and closing stock and, accordingly, it was necessary for a
cash balancing figure to be introduced.
106. HMRC say that AN
received commission from Pay Point but that there were no records of the income
and the same applied to the ancillary services provided by AN, although HMRC
concede these amounts may be at a small level.
107. HMRC refer to
the requirements under the Taxes Management Act for record keeping and although
the reference at Section 12B of the Taxes Management Act 1970 does not provide
actual detailed guidance, it does say at paragraph 1(a) “keep all such records
as may be requisite for the purpose of enabling the tax payer to make and
deliver a correct and complete return for the year or period”. HMRC say the
word “all” means all and refer to the requirement to keep records for the six
year period which was also disregarded in relation to the till rolls so that
had HMRC wanted to see these, they could not have done so.
108. HMRC say that,
based on the incomplete records, they had to carry out an exercise to test the accuracy
of the returns. This was done for three months and then having being told this
was insufficient, for twelve months.
109. HMRC say that
their business model exercise is robust based on AN’s statement that there had
been no material changes in pricing policy over the last ten years. As the
data for the initial year under enquiry was unavailable, data at 2008 and
relying on the statement was sufficient and WHC had visited the shop to take a
note of the prices.
110. Notes of the
minutes of the meetings were sent but no amendments were made or received.
111. An alternative dispute
resolution pilot exercise took place on 20 June 2011 but no agreement was reached.
112. A comparison
took place of the margins and data used by the HMRC and by WW/AN for tobacco
products and all the other categories of product which showed marked differences
in every respect. HMRC said that no explanation on contemporary evidence had
been produced to substantiate WW’s 2010 mark up rates.
113. HMRC say the
onus of proof lies with AN; that there is no corroboration of the theft and no
analysis of what was stolen and so it was not clear whether it was goods or
cash stolen or, if both, nor in what proportions.
114. HMRC say that AN
was given every opportunity to produce further information but did not do so.
115. HMRC say that
the assessments should be upheld.
Penalties
116. HMRC say that
the penalties are appropriate.
117. The penalties
for the years 2004-2005 to 2007-2008 were raised under Section 95 of the
Taxes Management Act 1970 and under Section 24 of the Finance Act 2007 for the year
2008-2009.
118. HMRC say that,
whereas a higher penalty would be applicable for the earlier years, the level
should be consistent and that the penalty loading of 30% was reasonable under
the new rules for 2008-2009. They, therefore, applied 30% to all years because
there had been no disclosure and a lack of cooperation and delays.
119. The total
penalties on tax amount to £14,307 on tax due of £48,661.34.
120. AN says the
penalties are excessive.
Reasons for the Decision
121. The Tribunal
were mindful and sympathetic to AN’s health and marital problems and to the
difficult and competitive trading conditions in which her business operated in
Airdrie.
122. The starting
point was that once HMRC had initiated their investigation and, particularly in
the absence of till rolls, all of which require to be kept for a period of six
years in terms of the Taxes Statutes, it, of necessity, became necessary for
HMRC to satisfy their enquiries by other means.
123. The reasons for
the enquiry was because HMRC ascertained that there was a shortfall in cash
which had been credited to sales and they questioned the accuracy of the sales
records.
124. HMRC could find
no record of drawings other than adjustments made for own goods taken from the
shop and the private use of a motor vehicle and AN had indicated that between zero
and £200 per week was taken from cash. HMRC were also concerned that the returned
gross margin was very low.
125. As a result of
the lack of actual records, the accounts initially for the year ended 31 October 2005 had to be recalculated and reasonable assumptions used.
126. Based on AN’s
assurances, HMRC based mark up figures on a review of costs, manufacturer’s
recommended retail prices and actual shop prices at June 2008 and purchase
costs based on a review of products bought in the year ended 31 October 2005.
127. WW, on AN’s
behalf, noted that there were some discrepancies in these business models and
objected to a three month sample recommending that a 12 month sample would be
more representative. This was carried out and provided a simple average mark up
of 14.6% and a gross profit ratio of 12.7%.
128. It is clear that
subsequent work carried out in relation to the Appeal used prices at 2010 and there
was an element in both models of some purchases being available in 2008 but not
in 2010 and vice versa.
129. The Tribunal had
more confidence in the 2008 figures which were prepared against a background of
an initial enquiry as against the 2010 figures which were much later and at a time
when there was an increasingly protracted dispute.
130. The Tribunal
also took into account the analysis and discussion of AN’s computation GM2
which, when the adjustment for wastage is corrected, produced a much higher
gross margin percentage than was reflected in the assessment.
131. The Tribunal concluded
that the document GM1 was not robust in proving that the gross profit margin
was 9.94% and, in any event, was significantly higher than the recorded figures
for AN throughout four prior years.
132. The Tribunal
noted that there was no record and some doubt in HMRC’s mind that the friend
who allegedly stole the goods ever existed and, if so, was ever employed and no
evidence was given to the Tribunal, other than a name about the employee who
was a friend of AN’s sister and appeared to be “to all intents and purposes running
the shop” which was open for nearly 13 hours a day, seven days a week for no
remuneration whatsoever, a circumstance which is by no means commonplace.
133. The Tribunal
also shared HMRC’s lack of understanding as to why the thefts were not reported
to the police. Even if that had resulted in no action being taken it would
have provided corroboration that the events had taken place and the sentiment expressed
by AN that the individual concerned might have lost her job, which was a job
working with quite possibly vulnerable people, lacked credibility.
134. The Tribunal were
similarly not persuaded by AN's credibility in relation to her direct assertion
that she had no funds to pay any tax demand when, following the Tribunal’s
enquiry, it transpired she owned the house adjoining her own.
135. In answer to the
assertion that money was being taken from the business which was required to
fund AN’s lifestyle, WW prepared a means test and this was a principal piece of
evidence in his discussion with HMRC to the extent that their suspicions were
unfounded. The Tribunal, again, had difficulties in giving a great deal of
weight to this evidence.
136. It appeared to
ignore cash drawings on the income side and, amongst other issues on the
expenditure side, included the full costs of a holiday to the United States of
America, which, in evidence, it had been said had been paid half in cash when
the holiday was booked one year before (ie July 2004) and the remainder paid
for by a credit card which seemed unlikely, given that the limit of AN’s credit
card was only £2,500.
137. It was unclear whether
the statement purported to be one of actual cash received and cash paid as
regards income and expenditure or whether, as was suggested by WW, some element
of accruals and a prepayment in relation to the US holiday had been taken into
account by WW.
138. In relation to
the GM2 document, WW suggested that the Tribunal should ignore this document
but it had been founded on and it seemed to have reached its gross percentage
profit conclusion on the unsound basis of increasing purchases by an estimated
wastage percentage.
139. The Tribunal also
had difficulty in accepting the robustness of the information contained within
the 31 October 2006 balance sheet and WW accepted that there were errors in the
balance sheet which in the Tribunal’s view were in part due to insufficient
records being available.
140. WW, on AN’s
behalf, argued that the HMRC guidance and other information available in
relation to grocery businesses restricted the amount of information that was
required to be retained, that stock takes were not necessary and set out his
basis for justifying the reason why the cash shortfall was credited to sales.
141. The Tribunal
understood that full and extensive accounting records may not be required in
practice but were of the view that the choice of which records to keep or not
to keep had to be seen in the context of the requirement under the Taxes
Management Act to “keep all such records as may be requisite for the purposes
of enabling the taxpayer to make and deliver a correct and complete return for
the year or period”.
142. The Tribunal’s
view was that all requisite records had not been retained and specifically till
rolls and that, in the circumstances, HMRC were justified in making their
enquiries and using the process they chose.
143. In conclusion,
the Tribunal considered the methodology and basis of HMRC’s assessment was fair
and reasonable.
144. The onus is on the
taxpayer to prove why the assessments raised by HMRC are incorrect by putting forward
sufficient evidence. Taking all the factors into account, the Tribunal were not
satisfied with the weight of the evidence to overturn HMRC’s assessments and,
accordingly, this element of the Appeal is refused.
145. The next issue
the Tribunal considered was the penalties and the efforts made to use the
alternative dispute resolution mechanism and then the independent internal HMRC
review process. AN had, in addition, attended all the interviews she was requested
to attend.
146. There had
clearly been issues of delay and incorrectly addressed correspondence by HMRC
but overlying the whole of this dispute between AN and HMRC was a series of
repeated requests for information which HMRC were entitled in statute to
request but which were not complied with.
147. In addition,
when the issues of AN’s health were raised and a discovery of the theft took
place, HMRC required independent verification of these matters which the
Tribunal believe could have been simply achieved.
148. The Tribunal
noted the abatement considered by HMRC and their decision to charge penalties at
the rate of 30% when for part of the period this could have been much higher
and, accordingly, uphold the level of penalties.
149. This aspect of
the Appeal is also refused.
150. 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.
W RUTHVEN GEMMELL,
WS
TRIBUNAL JUDGE
RELEASE DATE: 29 August 2012
