United Kingdom VAT & Duties Tribunals Decisions

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Cite as: [2008] UKVAT V20716

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Mrs Sharon Christina Cowie v Revenue & Customs [2008] UKVAT V20716 (24 June 2008)

20716

VAT ASSESSMENT – disputed input tax claim and under-declaration of output tax – input tax claim not supported by a valid VAT invoice – assessing officer performed a weighted mark up exercise to calculate the undeclared output tax – the exercise used figures taken from the Appellant's records – the exercise produced a rational outcome which was not challenged by the Appellant – assessment upheld –Appeal dismissed

MANCHESTER TRIBUNAL CENTRE

Mrs SHARON CHRISTINA COWIE Appellant

- and -

HER MAJESTY'S REVENUE and CUSTOMS Respondents

Tribunal: MICHAEL TILDESLEY OBE (Chairman)

WARREN SNOWDON JP (Member)

Sitting in public in North Shields on 2 June 2008

The Appellant did not appear

Bernard Hayley of the Solicitor's office of HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2008

DECISION

The Appeal

The Appellant was appealing against an assessment dated 27 March 2007 for VAT in the sum of £22,671.00 plus interest in respect of VAT periods 11/03 to 02/06 inclusive. The sum assessed comprised input tax of £1,180.00, and £21,491.00 output tax.

The Grounds of Appeal

The Appellant's grounds of Appeal as submitted by her representative were:

"That most of the input tax originally disallowed has now been agreed as correct with Mr David Webb, reviewing officer (Cheadle) and that the estimated under-declared output tax is an unfair calculation by the assessment officer and that the figures provided by my client are correct to the best of her knowledge and that no under-declaration had in fact taken place".

The Hearing on 2 June 2008

The Appellant did not attend the hearing. The tribunal clerk contacted the Appellant's representative and was told that he was not attending the hearing. The representative advised that his client was ill. The representative was under the impression that his client had contacted the tribunal to request an adjournment. We decided to proceed in the absence of the Appellant under rule 26 of Tribunal Rules 1986 because:

(1) The Tribunal notified the Appellant of the place date and time of the hearing.

(2) The Appellant had not contacted the Tribunal to request an adjournment.

(3) The Appeal had been previously adjourned in January 2008 at the Appellant's request.

(4) The Respondents' witness was present to give her evidence.

We heard evidence from Mrs Nichol, the Officer who issued the assessment. The Respondents also supplied a bundle of documents in evidence, which included the documents submitted by the Appellant.

The Facts Found

The Appellant carried on business as a sole proprietor of a public house, the Foresters Arms, Ryhope Street South, Sunderland. The Appellant principally sold alcoholic drinks and a limited range of soft drinks with no catering except crisps and nuts. There was a gaming machine and a pool table in the public house.

On the 19 December 2005 Mrs Nichol together with Mr Fox made an unannounced visit of the Appellant's premises. They discovered that the readings from the tills in the premises showed no date or time just consecutive numbers and that the VAT records kept by the Appellant were incomplete. Mrs Nichol required the Appellant to keep "z" readings with immediate effect. On 14 March 2006 Mrs Nichol made a return visit to collect the till rolls but those presented were wet and the ink had run rendering them unreadable.

Mrs Nichol's grounds for suspecting an under-declaration of output tax were:

(1) The discrepancies between the sales figures recorded on the weekly cash sheets and the sales declared on the VAT returns. The overall error rate for the period 08/03 to 08/05 excluding quarter 08/04 was 13 per cent.

(2) The absence of an audit trail in the form of till rolls and "z" readings for the sales figures.

Mrs Nichol decided to conduct a weighted mark up exercise to assess the under-declaration of VAT. This involved extracting the details of the Appellant's purchases of wet stock from the suppliers' invoices during a period of nine months which included the VAT quarters 02/05, 05/05 and 08/05. Mrs Nichol considered that this period of nine months involving three consecutive quarters provided a fair and accurate profile of the Appellant's business. Armed with the information of the Appellant's purchases and the price for each drink category sold by the Appellant, Mrs Nichol calculated a mark up rate and sales figure for each drink category. Mrs Nichol then totalled the purchase and sales figures for each drink category for the period of nine months which produced an overall mark-up rate of 122.06 per cent and a total sales figure of £120,876.31. Mrs Nichol deducted from the total sales figure an element for wastage derived from information supplied to her by Mr Cowie which produced a revised sales figure of £117,486.89. The expected output tax on the revised sales figure was £17,498.04 which when compared with the output tax declared of £11,214.73 for the nine month period produced an estimated under-declaration of VAT of £6,283.31 equating to an error rate of 56 per cent. Mrs Nichol applied the 56 per cent error rate to the output tax declared by the Appellant in quarters 11/03, 02/04, 05/04, 08/04, 11/04, 11/05 and 02/06 which resulted in an under-declaration of £15,208.00. This figure was added to the £6,283.31 for quarters 02/05, 05/05 and 08/05 producing the assessment of £21,491.00 for the under-declaration of output tax.

Mrs Nichol's total sales figure for the nine month period excluded sales of nuts, crisps and specific categories of soft drinks as well as the income from the gaming machine and pool table. The exclusion of these items worked to the Appellant's advantage since it under estimated the value of her sales during the assessment period.

Mrs Nichol gave the Appellant an opportunity to bring to her attention any factors which may affect the outcome of the weighted mark up exercise. The Appellant in response simply asserted that the figures used to prepare the VAT returns were correct. The Appellant, however, for the Appeal prepared a series of reports which included details of selling and costs prices of the four most popular drinks retailed in her public house, and the journals for sales and purchases covering the period of the assessment. The Appellant's selling price of the four most popular drinks, and the value of the purchases made during the nine months of the weighted mark up exercise broadly corresponded with the figures relied upon by Mrs Nichol. They differed on the unit purchase price for the four popular drinks. The Appellant provided no explanation for the derivation of her unit purchase price.

The Appellant calculated a percentage profit of 32.8 per cent from her figures which according to her was nearer to the average profit rate of 36 – 42 per cent achieved by small public houses than the profit rate of 57 per cent based on Mrs Nichol's computations. The Appellant's figures produced a mark up rate of around 50 per cent, which Mrs Nichol considered to be very low. In her experience the lowest mark up rate she had encountered for a public house was 90 per cent.

The dispute between the parties regarding input tax claims had largely been resolved. The outstanding amount of £1,180.00 included in the assessment related to nine small claims totalling £281.12 which the Appellant had conceded, and a sum of £902.30 claimed on an invoice issued by Window and Door Trade Centre in respect of supplies of double glazed units and doors made on 26 November 2003. The Respondents disallowed the input tax on the invoice because it did not contain a VAT registration number of the supplier. The Appellant failed to provide the VAT registration number despite several requests from the Respondents.

Reasons

Section 73 of VAT Act 1994 empowers the Respondents to raise assessments for unpaid VAT where it appears to them that the taxpayer's returns are incomplete or incorrect or to recover VAT which has been wrongly repaid or credited as input tax to the taxpayer.

Under section 73 the Respondents were required to consider fairly all material placed before them by the Appellant, and on that material, come to a decision which was reasonable and not arbitrary as to the amount of tax due. The Respondents were under no obligation to do the work of the Appellant by carrying out an exhaustive investigation of the Appellant's VAT returns and accounting journals.

In this Appeal Mrs Nichol had reasonable grounds for suspecting that the Appellant's VAT returns were inaccurate because of the discrepancies between the returns and the weekly cash sheets, and the absence of an audit trail. Mrs Nichol based her weighted mark up exercise upon figures taken from the Appellant's records. The documentary evidence supplied by the Appellant for the Appeal corroborated the values used by Mrs Nichol for the retail price of the drinks, and the total cost of the purchases. They differed only on the unit purchase price for the four popular drinks sold by the Appellant. We preferred the unit price used by Mrs Nichol because it was calculated from the supplier's invoices in the Appellant's possession. The Appellant gave no explanation for the origin of her unit price. Mrs Nichol chose a period of nine months of three consecutive VAT quarters for the weighted mark up exercise which we consider to be sufficiently long and representative of the Appellant's business for making reliable conclusions about the Appellant's value of sales. The Appellant advanced no compelling arguments challenging the results of the weighted mark up exercise. We are satisfied that Mrs Nichol's approach was fair and reasonable, which produced a rational basis for estimating the under-declared output tax with a high degree of accuracy. We, therefore, find that the amount of output tax not declared by the Appellant for the period in question was £21,491.00.

The sole disputed matter in respect of the input tax component of the assessment was the £902.30 claimed on an invoice issued by Window and Door Trade Centre. The Appellant was entitled to recover the input tax on the supply from Window and Door Trade Centre provided it was made by a taxable person for use in the Appellant's business and evidenced by a VAT invoice. Regulation 14(1) of the VAT Regulations 1995 defines the contents of a VAT invoice which include a requirement to state the VAT registration number of the supplier. The disputed invoice did not specify the VAT registration number of the Window and Door Trade Centre. Thus we find the Appellant was not entitled to a repayment of the input tax because it was not evidenced by a VAT invoice and on the face of it the Window and Door Trade Centre was not a taxable person.

Decision

For the reasons set out above we dismiss the Appellant's appeal against the assessment dated 27 March 2007 for VAT in the sum of £22,671.00 plus interest. The Respondents applied for a contribution of £150 from the Appellant towards its costs. Normally the Respondents do not apply for costs against unsuccessful Appellants unless it falls within the exceptions set out in the Hansard Statement on Costs in Tribunal Appeals dated 24 July 1986. It would appear that the Respondents were asserting that the Appellant misused Tribunal procedure by her failure to attend and prosecute her Appeal on two occasions. The Tribunal adjourned the first hearing in January because it was satisfied that the Appellant had a good reason for not attending. We consider her failure to appear at this hearing was not sufficient in itself to find that she misused the procedures of the Tribunal. We make no order for costs.

MICHAEL TILDESLEY OBE

CHAIRMAN

RELEASE DATE: 24 June 2008

MAN/

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