United Kingdom VAT & Duties Tribunals Decisions

 


19316

ASSESSMENT –whether amount of tax due assessed to the best judgment of Customs – whether assessment excessive – appeal dismissed – VATA 1994 s73(1)

LONDON TRIBUNAL CENTRE

	GORDON ROBERT STEPHEN	Appellants
	and
	THE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMS	Respondents

Tribunal : Rodney P Huggins (Chairman)

Claire Howell

Sitting in public in Plymouth on 29 September 2005

The Appellant in person.

Jonathan Holl of the Solicitor's Office of H M Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2005

DECISION

The appeal

1. Mr Gordon Robert Stephen (Mr Stephen/the Appellant) trading as Flash Gordon Gas and Leisure Hire was registered for value added tax (VAT) with effect from 10 October 2000 and is still so registered. He appeals against an assessment.
2. The assessment was made on 29 January 2003 and assessed tax of £10,172 and interest of £779.67 making a total assessed of £10,951.67 and was in respect of seven consecutive accounting periods from that ending on 31 March 2001 to that ending on 30 September 2002.

The legislation

3. The assessment was raised under the provisions of section 73(1) of the Value Added Tax Act 1994 (the 1994 Act) Section 73(1) provides :

"73(1) 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 judgment and notify it to him."

4. Section 83 of the 1994 Act provides that an appeal shall lie to a tribunal with respect to :

"(p) an assessment

(i) under section 73(1) … or the amount of such assessment."

The issues

5. The Appellant agreed at the tribunal that his seven returns were incorrect because in relation to input tax reclaimed by the Appellant, his output tax had been under-declared and the input tax figures were erroneous. However, he claimed that the amount of tax due from him had not been assessed to the best judgment of the Respondents and that the amount assessed was too high. Accordingly, the issues in the appeal were :

(1) whether Customs had assessed the amount of tax due to the best of their judgment under section 73(1) ; and

(2) whether the assessment should be reduced under section 83(p).

The evidence

6. The Appellant gave oral evidence.
7. A bundle of documents was produced by Customs. Oral evidence was given on behalf of Customs by Mrs Veronica Mary Argyle (Mrs Argyle) an officer of H M Revenue and Customs at the Plymouth VAT Office. She raised the assessment the subject of the appeal. We found Mrs Argyle to be a reliable witness.

The facts

8. From the evidence before us we find he following facts.
9. Mr Stephen has been in the bottled gas business for many years and on 12 September 2000 he acquired the business of a hardware shop at 1 Polsloe Road, Exeter from Mr Ray Tancock (Mr Tancock) who had traded there for several years. He continued to act as manager of the shop for some time afterwards.
10. Mr Tancock filed annual accounts with the Inland Revenue revealing that he had a turnover for the year ending 31 May 1999 of £42,152 with a gross profit ratio (GPR) of 35.72%; for the year ending 31 May 2000 with a GPR of 37.2% and for the period 1 June 2000 to 10 September 2001 of £59,570 with a GPR of 35.13%.
11. The Appellant introduced to the business the sale of bottled gas and concentrated on that aspect of the shop's activities. Over a period of time it represented approximately 65% of the whole turnover.
12. As he had registered for Vat with effect from 10 October 2000 he submitted VAT quarterly returns and covering the "assessed" periods, the following is a summary of the figures from the Vat Returns.

Period	Output tax declared £	Input tax declared £	Net repayment £
03/01	2372.50	5173	2440.50
06/01	288	4684	4396.00
09/01	1682	4368	2686.00
12/01	1347.50	4469	3121.50
03/02	1269	4730	3461.00
06/02	478	949	471.00
09/02	398	1364	966.00
	£8195	£25737	£17542.00

This produced an overall net repayment situation over the period of the assessment under appeal of £17,542.

13. Mrs Argyle contacted Mr Stephen to make an appointment for a Vat visit on 6 March 2002. The date arranged was to be the beginning of May. However, just prior to Mrs Argyle leaving her office for the planned visit, she received a telephone call from a friend of the Appellant asking that the visit was postponed since Mr Stephen realized he had probably destroyed all his financial records of the business.
14. The Appellant then wrote to Mrs Argyle on 2 May 2002 and stated as follows :

"Many thanks for your helpful attitude when we talked on the phone almost a week ago. I still can't believe I could be so absent minded. My family and I moved into the above address just over six months ago, and I confess to be being somewhat still in a muddle, at the time of writing this letter we have'nt as yet managed to cover the bare boards on our lounge floor.

I have attended two funerals in the last ten days the first was my nephew, Daniel, who died in tragic circumstances at only 33 years of age, I came home from a 600 mile roundtrip to Huddersfield, but on the way there I had called at my brothers hoping to check my workings regarding my VAT Returns, but found him very busy with his own business.

When I arrived back in Exeter, I needed to clean the top bedroom of all the rubbish including six black bags which I promptly put in the back of my vehicles and took everything including it would seem the black bag that had all the receipts and day books, VAT books etc and yes, I burnt the lot ! It was only when I came back and was endeavouring to lay out the books for your inspection that it dawned on me how foolish I had been.

I'm very sorry for what happened, needless to say I am now in the process of trying to get the necessary proof of income and outgoings. I have asked all my suppliers for copy invoices. Most have already arrived and today I saw my accountant who will try via bank statements, paying slips, cheque stubs etc to verify the past trading patterns.

I came across a tax return for year ending April 2000/2001, and so I didn't in the end see the previous accountant on the afternoon that I'd spoken with you in the morning. I will obtain an itemized set of accounts from the (previous accountant) soon or alternatively go to my recent mortgage sources for a copy.

In conclusion I hope to produce a set of accounts in the next few weeks, and more particularly regularise my VAT Returns as far as it is humanely possible. In this regards I will need to be aware of exactly what you require of me.

I now endeavour to clarify the relevant documentation and bring things to a reasonable satisfactory conclusion…"

15. Despite endeavours by Mrs Argyle to ascertain whether the Appellant had taken steps to reconstruct his financial records in June and August 2002, nothing happened so she visited the shop on 18 November 2002. She discovered that the Appellant had not taken any action to get duplicates of those original records which he asserted had been destroyed when he burnt them. She found that it appeared that the business was poorly organised and his affairs in a mess.
16. Mrs Argyle wrote to Mr Stephen on her return to her office in the following terms :

"I am writing to confirm the information I require to complete my inspection of your records. I was very disappointed to find that you had not obtained sufficient documents to reconstruct these following our conversation in May.

There are a number of inconsistencies in the returns rendered for periods 03/01 to 09/02 and it seems likely that an underdeclaration of VAT has occurred. I would like to calculate this as accurately as possible but in the absence of any information from you I will have to estimate the arrears involved.

I have now specifically asked you to obtain details of the value of stock for resale purchased from your major suppliers, notably FLOGAS, ALTAGAS, DECCO AND Compass. Totals of tax exclusive values for the periods 10 10 00 to 30 09 02 are required. In the case of gas please indicate how much was subject to VAT at the standard rate (17.5%) and how much at the reduced rate (5%).

It would be useful if you could also estimate the opening and closing stocks for both gas and hardware and approximately what percentage of your sales was attributable to hardware, and then what proportion of these was zero rated.

It may be that your accountant – TAX ASSIST- has already established turnover and the cost of sales. Please forward any accounts prepared even if these are still in draft form.

A record of daily gross takings must be set up immediately. I have enclosed a copy of Notice 727 which explains the details required."

17. On 9 January 2003 Mrs Argyle contacted Mr Stehen on the telephone. He said that he had still not obtained any duplicate bank statements or invoices and had also not made any estimations. They discussed what percentage of turnover was attributable to gas sales and he estimated 65%. He also agreed that the balance of 35% would relate to hardware and sundry sales.
18. On 24 January 2003, Mrs Argyle wrote again to the Appellant. This letter effectively sets out how the assessment is calculated. It reads as follows :

"I am writing further to our most recent discussion when you confirmed you were unable to obtain any documentary evidence to support declarations made on VAT returns for Periods 03/01 to 09/02. As a result you have been unable to reconstruct the records you inadvertently burned in May 2002.

I have reviewed the VAT declarations from a number of angles and consider that VAT has been underdeclared. When we last spoke you advised that gas sales amounted to approximately 65% of your turnover and the balance reflects sales of hardware and receipts from hired goods. Net outputs declared to 30^th September 2002 were £221,113 and on this basis output tax of £6,843.97 would be due if all sales were liable at 5%. The remaining 35% turnover, ie. £77,389.55 would be liable at the standard rate of 17.5% and would produce a liability of £11,526.10. I have calculated liabilities on a tax inclusive basis.

Accordingly, output tax expected amounts to £18,370 compared to £8,195 declared. Arrears to be assessed are £10,175. A schedule is attached showing how these have been attributed to each of the VAT periods concerned. A formal Notice of Assessment will be issued shortly. Details of interest and any penalties due will also be advised

Whilst I have calculate the arrears from the outputs declared I have also looked at the input tax claimed. For the whole period this amounted to £25,737 which would give rise to taxable expenditure of £147,068. (all gas supplied to you at this time was subject to the 17.5% standard rate). Assuming that 10% related to business overheads standard rated purchases for resale or hire would be £132,362. Gas for resale would amount to £85,550 approximately. This figure is calculated from sales using an average mark up of 60% on cash and carry sales. This formula then leaves a figure for other purchases amounting to £46,812. When compared to hardware sales the mark up produced is 70%. This may appear rather high but of course no adjustment has been made to sales for hire receipts. I have been unable to make any allowance for stock increases or reductions as this information, requested in November, has not been forwarded.

The method used for the assessments assumes that you were fully entitled to all the input tax claimed. When your records are reconstructed a further assessment could become due in respect of input tax overclaimed or even for additional output tax."

19. The assessment was issued on 29 January 2003. At that time Mr Keith Coates of Tax Assist Direct who was acting for the Appellant as his Accountant at the time wrote to Mrs Argyle and said that her letter had concentrated his client's mind and "he's constructed most of the information from duplicate invoices since April 2002". Mr Coates added "it will take another week before I can get his reconstructed records and prepare schedules for you from 2002." Needless to say, such records never materialised.
20. On 22 May 2003 Mr Coates wrote again to the VAT Regional Debt Management Unit at Southampton and said Mr Stephen would be paying £400 "as the first payment on account". He also said he promised to pay at least £400 a month towards his arrears. Only one such payment was made.
21. On 18 August 2003 V Mills & Co Accountants of Exeter informed Customs that they had taken over from Tax Assist Direct and asked for a period of grace for the Appellant to complete the sale of 1 Polsloe Rod in order to release the necessary funds to clear outstanding liabilities. They asked to be supplied with copies of the VAT returns for the assessment periods and handed over another £400 cheque.
22. Upon receipt of the copies of the VAT returns, V Mills & Co stated in a letter dated 16 September 2003 that they had obtained from previous agents a copy of the income tax return for the year to 5 April 2002 which showed that the income from the business for the 12 months trading was £82,353 as compared with £133,322 shown on the VAT returns for the same period leaving a discrepancy of £50,969.
23. They commented in their letter "this has been discussed with Mr Stephen who cannot offer any definite explanation except to say that there is no way the income shown on the VAT returns can be correct as he never achieved that levels of turnover in all the years he has been in business." The Accountants suggested adjustments which should be made to the assessment.
24. Customs Officer Mr J MacD McCubbin a VAT Appeals & Reconsideration Officer responded on 16 November 2003. He asked for a copy of the Annual Accounts for the years 2001/2002. Eventually, after reminders on 20 January 2004, T V Mills & Co forwarded a copy of the Annual Accounts for the year ending 31 March 2002 which revealed gross sales of £92,233 for the year ending 31 March 2001 and £82, 353 for the following year.
25. Mr Stephen admitted at the tribunal that these accounts were prepared from his memory after an hour's discussion with Mr Coates and he could not substantiate any of the information in the accounts.
26. Following a telephone conversation between a representative of T V Mills & Co and Mr MacD McCubbin on 10 February 2004, the latter wrote to T V Mills & Co on 12 February 2004 and stated that the officer (Mrs Argyle) obviously had considerable problems in attempting to verify the tax declarations made by Mr Stephen due to records not being available. He set out the relevant figures as to purchases and closing stock in the business for the years ending in 2001 and 2002 and also the amounts of input tax claimed and the net tax liabilities for the accounting periods forming the assessment.
27. In the circumstances, Mr MacD McCubbin supported the decision of Officer Argyle to raise the assessment and for the reasons given in his letter referred the matter back to the debt management Unit pointing out the Appellant's right to appeal. He appealed on 3 March 2004.

The submissions

28. Mr Holl submitted that by virtue of Section 73(1) of the 1994 Act where a person such as the Appellant had failed to keep any documents and afford the facilities necessary to verify VAT returns or where it appears to the Respondents 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 it to him.
29. He argued that was exactly what Mrs Argyle had to do bearing in mind that there were no financial records available to her at the time the assessment was made.
30. He said that the tribunal had to consider whether Customs used their best judgment in making the assessment and referred the tribunal to the tribunal decision in Curry Inn Restaurant v The Commissioners of Customs and Excise [1998[ LON/97/834 where guidance was given on the principles involved in paragraph 42.
31. Turning to the question of quantum of the assessment, Mr Holl asked the tribunal whether there was any other viable method of calculation which Mrs Argyle could have used. He maintained there was not.
32. Mr Stephen said that he had been disadvantaged by the assessment. Mr Holl replied that the Respondents did not as a rule want to disadvantage traders but have a statutory duty to pursue claims for VAT which are legitimately claimed.

Reasons for the decision

33. In considering the appeal before us, there are two issues to be determined. They are :

(i) was the amount of the tax due assessed to best judgment ?

(ii) was the assessment excessive ?

34. We also have to take into account that the burden of proof is on the Appellant to satisfy the tribunal of any facts upon which he seeks to rely and the standard of proof is the balance of probabilities. A particular feature of this appeal is the total absence of any documentary evidence from the Appellant except for a copy of purported annual accounts for the year ending 31 March 2002 which were not supplied to Customs until 20 January 2004 over twelve months after the assessment was raised.

Issue (i) was the amount of tax due assessed to best judgment ?

35. The first issue is whether Customs assessed the amount of tax due to the best of their judgment within the meaning of section 73(1) of the 1994 Act.
36. In considering the meaning of the phrase "to the best of their judgment" we refer to the decisions in Van Boeckel v Customs and Excise Commissioners [1981] STC 290 and Rahman v Customs and Excise Commissioners (No 1) [1998] STC 826 which establish six principles. First, there must be some material before Customs on which they can base their judgment. Secondly, Customs are not required to do the work of the taxpayer in order to form a conclusion as to the amount of tax due. Thirdly, Customs are required to exercise their powers in such a way that they make a valued judgment on the material which is before them. Fourthly, the tribunal should not treat an assessment as valid merely because it disagrees as to how the judgment should have been exercised; a much stronger finding is required, for example, that the assessment has been reached "dishonestly, capriciously or vindictively" or was a "spurious estimate or guess in which all the elements of judgment were missing" or was "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 have made an honest and genuine attempt to reach a fair assessment and the debate before the tribunal should be concentrated on ascertaining whether the amount of the assessment should be sustained in the light of the material then available.
37. We now consider those principles (which we accept) in the light of all the facts of the present appeal and of the evidence before us.
38. The Appellant has been in the bottled gas business for many years. He purchased the hardware shop of Mr Tancock in September 2000 in order to support his business. In the bundle of documents produced to us at pages 84 and 85 there is a collection of information which Mrs Argyle had obtained from Inland Revenue files relating to the Appellant's tax affairs. She did not have the benefit of this information until much later after she made her assessment in January 2003. This information was not challenged by Mr Stephen at the tribunal hearing. It reveals that the first set of accounts filed by Mr Stephen were for the period 1 July 2000 to 31 March 2001. This revealed a turnover of £92,333 for a period of only nine months. They were prepared by Mr Stephen's first Accountant Mr M J Smith of Exton from incomplete records. Apparently, at an interview with the Inland Revenue Mr Stephen said he deliberately overstated his turnover by £12,000 to £14,000 in order to secure a mortgage on 1 Polsloe Road, Exeter.
39. In May 2002, Mr Stephen was unable to see Mrs Argyle as he stated he had accidentally burnt all his records just before her scheduled visit. Mrs Argyle quite properly asked the Appellant on at least three occasions before 1 November 2002 to obtain duplicate records. Indeed, despite repeated requests to reconstruct them, he has failed to do so. At the hearing, he produced nothing. Mrs Argyle suspected that he had not maintained any financial records since the fire.
40. However, what had occurred was that Mr Stephen had regularly from period 03/01 until 09/02 submitted Vat returns showing net outputs of £221,113. Over these periods, the Appellant received a total of £17,542 of repayments because he asserted his input tax had exceeded his output tax by this amount.
41. At the hearing, Mr Stephen said that these figures were inflated because he had estimated them. He did not inform Mrs Argyle about this when she saw him in November 2002 and spoke to him on the telephone.
42. Mrs Argyle ascertained during her conversations with Mr Stephen that he estimated 65% of his turnover related to gas sales and 35% to hardware and sundry sales. In the absence of any tangible records, Mrs Argyle used a method of calculation that is routinely utilized in such situations. Although there were no stock figures. The Appellant informed her there had been no significant rise over the period.
43. In the circumstances, Mrs Argyle had no alternative but to assume Mr Stephen was fully entitled to all the input tax he had claimed. She may have been suspicious that the returns were not correct but she had nothing further to work on. The tribunal finds that was a perfectly reasonable method for her to adopt. The Appellant had been evasive and non-cooperative as far as his records were concerned and this even continued after the alleged fire had taken place because he has never produced records for the periods May to September 2002 although he continued to claim net repayments of £471 and £966 for the periods 06/02 and 09/02.
44. In these circumstances. We conclude that the amount of tax was assessed to the best judgment of Customs.

Issue (2) was the assessment excessive ?

45. The second issue is whether the assessment is excessive and should be reduced.
46. Section 83(p) of the 1994 Act provides for an appeal both against an assessment and the amount of the assessment. However, it is for the Appellant to satisfy the tribunal, on the balance of probabilities, that the assessment is excessive. Much, therefore, will depend on the evidence that an appellant is able to adduce to support his contentions. The burden of proof was described by Forbes J in Tynewydd Labour Working Men's Club and Institute Ltd v Customs and Excise Commissioners [1979] STC 570 in the following way :

"… any taxpayer who appeals to the tribunal takes upon himself the burden of proving the assertion he makes. Namely that the assessment is wrong because unless he proves this there is nothing on which the tribunal can find as error in the assessment. There should be no difficulty in the way of the appellant assuming this burden. The facts and figures are known to him, and if he does not understand the Commissioners' case, the rules provide for the Commissioners to give a proper explanation."

47. The Appellant has contended, as set out in his Notice of Appeal that 'following VAT inspection, due to loss of most of his records the method used [by the Respondents] to calculate his sales disadvantaged him.'
48. The Appellant has not provided any evidence in support of his claim except (through his Accountants) at a late stage (20 January 2004) a copy of his annual accounts for the year ending 31 March 2002. These accounts were considered by Officer McCubbin in his letter of 12 February 2004. He said (and we accept) "it would certainly appear from the figures produced that the … input tax totals have been estimated only". [He referred to the figures in the VAT returns for the periods in the assessment]. "if the figures were said to be correct then by looking at the output tax, as declared, plus the additional amounts assessed by Mrs Argyle, there is still no'positive' mark-up achieved." He then set out the relevant figures as follows :

- Tax declared over he assessed period	8195
- Plus underdeclared output tax	10175
	18370
- Input Tax claimed on returns, above	25737
# Officer has assumed 10% as relevant to taxable expenses/overheads	(2573)
Net	23104

49. The annual accounts supplied were in any event unreliable as admitted by Mr Stephen at the tribunal hearing. Mr Coates prepared these accounts from very limited information and indeed had no takings records available.
50. The Appellant has not explained why he feels that the methods used to calculate sales were disadvantageous. He does not offer an alternative method of calculation which he feels would be fairer. Bearing in mind from the above figures that the amount of tax assessed plus the tax originally put forward in the returns as output tax still does not exceed the estimated "resale" input tax claimed, we find there is no "disadvantage" in this case.
51. On the evidence before us, the Appellant has failed to discharge the burden of proving that the assessment was excessive.

Decision

52. Our decisions on the issues for determination in the appeal are :

(1) Customs did assess the amount of the tax due from the Appellant to the best of their judgment; and

(2) the assessment was not excessive and should not be reduced.

53. The appeal against the assessment is dismissed.
54. There is no order as to costs.

RODNEY P HUGGINS

Chairman

Release date : 28 October 2005

LON/2004/190