[2010] UKFTT 613 (TC)

TC00855

Appeal reference: TC/2009/09793

VAT – assessment to tax – whether assessments to best judgment – yes – appeal dismissed

FIRST- TIER TRIBUNAL
TAX

   DAVID DEAN T/A THE GEORGE & DRAGON	Appellant

- and -

THE COMMISSIONERS FOR
                          HER MAJESTY’S REVENUE AND CUSTOMS           Respondents

Tribunal: 	Jennifer Trigger (Judge)
G N Barrett (Member)

Sitting in public in Manchester on 16 September 2010

The Appellant appeared in person

Mr. Richard Mansell, counsel, instructed by the General Counsel and Solicitor to Her Majesty’s Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.	This is an appeal by David Dean, trading as The George and Dragon (“the Appellant”) who, during the period relevant to this appeal, carried on business as a public house from The George and Dragon, 21-23 Sunderland Street, Macclesfield against a Notice of Assessment to VAT.  The assessment to VAT is for the period 28 June 2007 to 31 August 2008.  From a repayment of £11,814.95 to a payment of £9,160 in the first instance, thereafter reduced to a repayment of £3,438.

2.	In the Statement of Ccase dated 14 September 2009 the Commissioners For Her Majesty’s Revenue and Customs (“the Respondents”) set out the grounds upon which they made their decision to assess the Appellant to tax as follows:

“1. The Appellant [Mr. David Dean] carried on business as a public house from The George and Dragon, 21-23 Sunderland Street, Macclesfield.  The Appellant subsequently moved to the Elsmere Arms and then to the Farmers Arms, 79 West Street, Congleton CW12 1JY.

2. The Appellant has been registered as a sole proprietor with effect from 29 June 2007 under VAT registration number 934713323.

3. The Appellant took over The George And Dragon public house at 21-23 Sunderland Street, Macclesfield from Robinsons Brewery on 28 June 2007.  The Appellant has subsequently moved to the Elsmere Arms and then to the Farmers Arms.  The VAT return for the period 28 June 2007 to 31 August 2008 relates to the period when the Appellant ran The George and Dragon.

4. The Appellant applied to register for VAT, which was received by the Respondents on 6 July 2008.  The Appellant incurred a belated notification penalty due to the late VAT registration in the sum of £1,487.  The Appellant’s first VAT period was a long period from 28 June 2007 to 31 August 2008 (period 08/08).  The Respondents received the VAT return for the period 08/08 on 19 November 2008.  The Appellant claimed that VAT of £11,814.95 was due to him from the Respondents.

5. Officers of the Respondents visited the Appellant on 10 December 2008 to conduct a VAT inspection of the business records and to verify the VAT return for period 08/08.  The Respondents identified that the cashing up procedures were rudimentary and consisted of one till which was used as a cash draw.  The cash was totalled at the end of each day and the total entered onto a piece of paper and transferred onto a weekly sheet.  Little cash was banked and the cash was used to pay expenses.  The Appellant informed the Respondents that he had applied a 42% mark-up to the wet stock purchased from the time he took over the pub.  The Respondents found that the purchases and sales declarations reflected a mark-up of minus 14%.

6. The Respondents calculated the VAT using the 42% mark-up as follows:

Wet purchases			£176,118.00
Less closing stock		£1,000.00 (advised by the Appellant)
Less 1% wastage		£1752.00
Total				£173,366.00

X 42%				£246,180.00
X 7/47				£36,655.00 output tax due
Output tax declared		£22,459.00
Under-declaration		£14,206.00

7. The Appellant produced a list of purchases and expenses to support the input tax claimed.  The Respondents noted that the Appellant had calculated and claimed VAT on every item regardless of whether or not VAT had been incurred or whether or not they were for business purposes.  The Respondents was unable to readily identify those items on which VAT was deductible as input tax.  The Respondents allowed the input tax claims in respect of wet purchases and rent in the sums of £26,230.40 and £1,274.89 = £27,505.00.  The Appellant was invited to produce a schedule together with the associated VAT invoices to support any addition input tax claim.

8. The VAT return for the period 08/08 was amended by the Respondents’ letter dated 11 December 2008 as follows:

Output tax			£36,665.00
Input tax			£27,505.00
Net payment due		£9,160.00

The total adjustment to the 08/08 period of the VAT return was the sum of £20,974.99.

9. The Respondents contacted the Appellant by telephone on 29 April 2009 after the appeal had been submitted.  The Appellant stated that:

•	A member of staff had stolen cash and although it was captured on CCTV the police would not take action
•	The reason for repayment in the first period was heavy expenditure
•	He had carried out a pint-for-pint audit which supported his case.

The Respondents asked the Appellant to submit the pint-for-pint audit.

10. The pint-for-pint audit was received by the Respondents on 29 May 2009.  The pint-for-pint audit shows for the whole period and for each product, an analysis of wet purchases, wastage, returns and average selling prices.  The audit also shows the total sales for drinks, bar snacks, gaming machines and pool tables.  A list of gross weekly income and expenses was also provided by the Appellant.

11. The Respondents examined the schedules provided and noted the following:

•	The Appellant appears to have used the gross weekly income list to calculate the output tax due since the total x7/47 = £22,454.00.
•	The total output tax declared was £22,459.00.
•	The total income figure also equals the total sales on the pint-for-pint audit.  The pint-for-pint audit is based on average selling prices over the period, so an exact match between the two figures appears unrealistic.
•	The gross weekly expenses total is £188,992.57.
•	7/47 of the total = £28,147.82.
•	The net result between output tax and input tax is a net repayment of £5,693.76.
•	The total input tax on the VAT return (for period 08/08) was £34,274.82.
•	The Appellant has accepted that the input tax claimed on the VAT return (period 08/08) is too high after the Respondents identified that he claim included VAT on non VAT able items.
•	No backup to the revised input tax claim has been produced to the Respondents.

12. The Respondents tested the validity of the pint-for-pint audit and compared the audit results to the Respondents assessment calculations.  The Respondents tested the validity of the pint-for-pint audit by:

•	A gross purchases figure was calculated using the Appellant’s figures in the pint-for-pint audit and assuming a 42% mark-up for all beers and estimated mark-ups for other lines.
•	The exercise produced gross wet purchases of £105,695.00.
•	The VAT for rent used in the Respondents’ assessment was allowed for.
•	The total input tax calculated equalled £17,015.00.
•	The total VAT due or repayable equalled £5,439.00 VAT due.

13. The Respondents’ assessment had used a gross purchases figure of £176,118.00.

•	Each payment made to Robinsons brewery for wet stock had been identified using the receipts given by the brewery for the payments.  No invoices were made available to the Respondents offices at the visit.
•	The Respondents noted that there was an error in the list of payments initially recorded.  The total payments should be £134,360.00.
•	The Respondents recalculated the assessment calculations and used the Appellant’s figures for the return and wastage.  The output tax was recalculated as being £27,351.00 and the input tax of £20,752.00, the net VAT due was £6,598.00.

14. The Respondents wrote to the Appellant on 23 June 2009 and enclosed the calculations and the Respondents’ visiting officer’s list of purchases.  The Appellant was invited to produce further evidence to support input tax deduction.

15. The Appellant called at the Respondents Stockport office with a box of records.  The records consisted of the following:

•	Weekly summary sheets showing daily gross takings
•	Weekly total
•	Single total for purchases
•	Attached to each sheet were various purchase documents such as invoices, statements, till receipts and remittance advices.

The Respondents noted that:

•	There was no list from which purchases and the VAT amount could be easily identified.
•	There was more VAT to be allowed than had been allowed for in the Respondents assessment.
•	The Appellant was not going to produce a daybook-style record.

The Respondents agreed to take the records in order to make a reasonable estimate of the input tax.  The Respondents examined and analysed the records as follows:

•	There appeared to be no pattern on which to make a best judgment estimate.
•	A week-by-week analysis was undertaken by the director and an Analysis of Purchases schedule and sample documents for weeks 13 and 28 was prepared and identified.
•	It was apparent that the Appellant had included items that were not deductible for example in respect of rates, food and payment demands.
•	At page 4 of the analysis the Respondents calculated input tax on expenses, included the Respondents visiting officer’s analysis of purchases from Robinsons brewery and estimated VAT paid in respect of rent.  In total the input tax allowable was £23,913.53.
•	A revised assessment was prepared with the following figures:
Output tax			£27,351.00
Input tax			£23,913.00
Net tax due			£3,438.00

16. The Respondents wrote to the Appellant on 14 August 2009 enclosing the Analysis of Purchases and Assessment Calculations.”

3.	The Appellant’s case, as disclosed by the Notice of Appeal is that:

“Basically I filled in a VAT Returns form and I worked out by adding up my takings working out how much VAT I owed.  Then working out my expenses then working out how much VAT was owed to me.  The office assigned to my case looked at my papers and said that I owed VAT because basically Pubs do not get a refund on VAT.  I am sorry but I am using basic mathematics adding up and taking away and after working out several times it still totals that VAT owe me.”

4.	Next, we deal with the law applicable to the tax assessment applicable in cases such as the instant one.  The Value Added Tax Act 1994 (“the 1994 Act”) applies - in particular we took account of section 24, section 25(3) and section 73.  Together with regulation 29 of the Value Added Tax Regulations 1995.  In particular where it appears to the Respondents that a taxpayer has made an incomplete or incorrect VAT return, by section 73 of the 1994 Act the Respondents may assess the amount of VAT due from the taxpayer to the best of its judgment and notify the taxpayer.  We were referred by Mr. Mansell for the Respondents to the following case law which had been considered by the Respondents in making the assessment:

Van Boeckel v Customs and Excise Commissioners [1981] STC 290

Rahman (trading as Khayam Restaurant) v Customs and Excise Commissioners [1998] STC 826

Rahman (trading as Khayam Restaurant) v Customs and Excise Commissioners (number 2) [2003] 150, CA

On the issue of best judgment we noted at paragraph 2 in Rahman (trading as Khayam Restaurant) v Customs and Excise Commissioners (number 2) [2003] 150, Chadwick LJ opined:

“Therefore it is important to come to a conclusion as to what are the obligations placed on the Commissioners in order properly to come to a view as to the amount of tax due, to the best of their judgment.  As to this, the very use of the word ‘judgment’ makes it clear that the Commissioner are required to exercise their powers in such a way that they make a value judgment on the material which is before them.  Clearly they must perform that function honestly and bona fide.  It would be a misuse of that power if the Commissioners were to decide on a figure which they knew was, or thought was, in excess of the amount which could possibly be payable, and then leave it to the taxpayer to seek on appeal to reduce the assessment.  Secondly, clearly there must be some material before the Commissioners on which they can base their judgment.  If there is no material at all it would be impossible to form a judgment as to what tax is due.  Thirdly, it should be recognised, bearing in mind the primary obligation to which I have made reference, of the taxpayer to make a return himself, that the Commissioners should not be required to do the work of the taxpayer in order to form a conclusion as to the amount of tax which to their best of their judgment is due.  In the very nature of things frequently the relevant information will be readily available to the taxpayer, but it will be very difficult for the Commissioners to obtain that information without carrying out extensive investigations.  In my view, the use of the words “best of their judgment” does not envisage the burden being placed on the Commissioners of carrying out extensive investigations.  What the words “best of their judgment” envisaged, in my view, is that the Commissioners will fairly consider all of the material placed before them and on that material, come to a decision which is reasonable and not arbitrary as to the amount of tax which is due.”

5.	At paragraph 36 of his judgment in Rahman (number 2), Chadwick LJ added:

“But the fact that a different methodology would, or might, have led to a different – even to a more accurate – result does not compel the conclusion that the methodology that was adopted was so obviously flawed that it could and should have had no place in the exercise of best judgment.”

6.	Before us the Appellant was unrepresented, and the Respondents were represented by Mr. Mansell.  We were presented with five bundles of copy documents by the respondents and copy documents numbered A-R inclusive by the Appellant.  In addition we were supplied with a copy of a letter dated 23 August 2010 from the Appellant to Joshua Hanson of the Tribunal Service.  This document was extracted from the tribunal file and copied to all parties.  The relevance of this document was considered by us when dealing with an application for costs made on behalf of the Respondents which we shall address at a later stage.  We took evidence on oath from Nicola Williams (formerly Nicola Mather) and evidence by way of affirmation from Eileen Brewis.  Before us Mrs. Williams gave evidence in accordance with her statements dated 29 September 2009.  In addition she told us that at her visit to The George and Dragon public house on 10 October 2008, in the company of the Appellant, she saw no evidence of any expenditure of a capital nature at the premises.  At that meeting Mrs. Williams recorded that a Norman Eccleston, Area Manager for Robinson’s brewery had advised the Appellant to apply a 42% mark-up.  The application of the mark-up was an issue between the parties.  Although the issue had not been raised prior to the hearing before us.  The Appellant told us that he had been advised by Neal & Co. Accounting For Business Ltd that he should be attaining a gross profit return of at least 43% on his beer sales, but due to the nature of his tie, he would probably obtain nearer 41%.  The Appellant produced copy correspondence dated 15 September 2010 from Neal & Co. which is Exhibit C in the copy documents given to us by the Appellant at the hearing.  The Appellant told us that although he had been advised to apply a mark-up in the region of 41% to 43% he had not applied such a mark-up to his sales.  We decided on the balance of probabilities that a mark-up of 42% had been applied by the Appellant.  The Appellant had had advice on the amount of the mark-up and, in our view, he had at the time of his meeting with Mrs. Williams on 10 October 2008 confirmed that a mark-up of 42% was being used by him in his business.

7.	The Appellant made an application for an adjournment.  He requested the adjournment in order to obtain legal representation.  The Appellant said he did not feel that he could manage to conduct his own case as he had not realised the full implication of conducting his own appeal.  The Appellant felt that he was out of his depth and that the conduct of the appeal was beyond his capabilities.

Mr. Mansell, on behalf of the Respondents, objected to the application.  Mr. Mansell pointed out that prior to the hearing before us there had been four separate occasions when the case had been before a tribunal.  In particular on 16 August 2010 at a case management hearing in front of Judge Demack there had been full disclosure on matters of procedure, presentation and disclosure of documents.  On this occasion the only issue raised by the Appellant was that the venue for the tribunal hearing be altered.  Mr. Mansell contended that the Appellant had had ample opportunity to seek advice and representation prior to today’s hearing.

We adjourned to consider the application and found against the Appellant.  It was our view that the Appellant had had ample opportunity to take advice on the appeal and to take representation had he considered it necessary.  Before us the Appellant had confirmed that he had received the copy documents before us and that he had read all those documents.  In our view, after reading the documents the Appellant had formed the view that he did not need representation.

In the circumstances we decided to rise early and allow the Appellant additional time to consider the witness evidence of Eileen Brewis which was to be presented next.

8.	Eileen Brewis confirmed the contents of her statement dated 5 October 2009.  On oath the Appellant told us that he conducted his daily business by putting a float in the till.  At the end of each day his takings were totalled and the float deducted.  He recorded the amount on paper each day and at the end of the week totalled the daily figures.  From that weekly figure expenses were deducted as they were received each week, even though the expense may be for a different period of time, such as a quarterly bill.  No apportionment was done.  The Appellant recognised that he had used invoices where no VAT had been paid.

The quantities that the Appellant used in his calculation were taken from the delivery notes.

In an attempt to maintain trade and to compete with nearby licensed premises, such as those owned by Wetherspoons, the Appellant had each day at last orders sold his beer at a price equivalent to that of his competitors.  The Appellant had started gambling.  He told us that during the period 08/08 he had spent £80,000 on placing bets and had won £163,000.  In order to sustain his business the Appellant had used those winnings in the management of his business.  We were provided with betting slips by the Appellant.  We did not consider that we could rely on those betting slips.  There was no indication from the Appellant as to the amount of his winnings which had been used in running his business.  There was no evidence to substantiate his claim.  Furthermore we considered it highly improbable that the Appellant would have retained betting slips for a period from 28 June 2007 to 31 August 2008. particularly in circumstances where he would undoubtedly have lost money when placing a bet.  We decided we could place little weight on this part of the Appellant’s evidence that he had used the proceeds of gambling to run his business.
The Appellant was unable to provide any evidence to undermine the tax assessment by the Respondents.

The Appellant told us that a barman had stolen £3,500 from his till.  The Appellant could not be entirely accurate as to the amount of money taken.  From the amount of stock reduction was only able to tell us that a minimum of £2,800 to a maximum of £3,500 had been taken.  It was accepted by the Appellant that Vat would be payable in any event on the sum taken.  The monies taken had not been included by the Appellant in the calculations produced by him and recorded at documents 120 and 121.

The Appellant accepted, before us, that he had no method for ascertaining what money had been taken out of the till by members of staff.  The Appellant was unable to tell us what mark-up he used during the period 08/08 nor could he tell us how he had compiled the figures contained in the Value Added Tax return for the period 08/08, a duplicate of which was before us at document 35.

9.	We now turn to our findings of fact.  We find that:

•	The Appellant applied a 42% mark-up on sales
•	The Appellant had made an incomplete or incorrect VAT return
•	The Respondents had used their best judgment in assessing the tax due and had notified the Appellant of the amount of VAT due from him
•	The Appellant had produced no evidence to show that the Respondents had failed to use the best of their judgment in assessing the VAT due from the Appellant
•	For the period 28 June 2007 to 31 August 2008 the VAT due from the Appellant to the Respondents was £3,438.00

10.	Accordingly we dismissed the appeal.

11.	There was no application for costs by the Respondents in respect of the appeal hearing.  However, an application had been made the Respondents for costs in any event for the hearing on 10 August 2010.  Mr. Mansell explained to us that a hearing on 8 May 2010 had been adjourned because it had been incorrect listed at Manchester when the Appellant had specified that the hearing venue should be at Birmingham.  The hearing was relisted for 19 May 2010.  The Appellant did not attend.  A telephone call had been received on Friday 16 May 2010 from an employee of the Appellant, who advised that the Appellant would not be attending the appeal listed for Monday 19 May 2010 as he was abroad and unable to return by that date.

The hearing on 19 May 2010 was adjourned and the issue of costs reserved.

The matter was relisted for hearing on 10 August 2010.  In the interim correspondence was sent to the Appellant requesting information on issues relevant to the procedure, such as the proposed length of the hearing, the number of witnesses and whether the Appellant would be represented.

The Appellant did not attend the hearing on 10 August 2010.  Costs were reserved and the case listed for a case management hearing on 16 August 2010.

On 23 August 2010 correspondence was sent by the Appellant to the tribunal giving the reasons why the Appellant failed to attend the hearing on 19 May 2010.

Mr. Mansell told us that the Respondents were not seeking costs for the adjourned hearing on 19 May 2010, but was claiming for his costs of the adjourned hearing on 10 August 2010.

Mr. Dean said that he was unaware of the hearing on 10 August 2010.  He objected to the application for costs by the Respondents.  He advised that he had been resident at the Bridge Tavern from 12 October 2009 to 2 July 2010.  On 3 July 2010 he had moved into the Swan Inn.  His post was delivered to the Swan Inn and put on the bar.  If he was in the licensed part of the premises at the time he would collect the post.  Otherwise the post was left or dealt with by an employee.  This had been his usual practice in all the licensed premises that he had run.  The Appellant could not account for the failure to received the notice of the hearing on 10 August 2010.  Mr. Mansell confirmed that the hearing notice was dated 23 June 2010 and had been received by the Respondents on 25 June 2010.  At that time we noted that the Appellant would still be resident at the Bridge Tavern.

The Appellant said that apart from his failure to attend on 10 August 2010 he had always attending hearings that had been given notice of and also meetings with the Respondents’ officers.  It was, as he told us, in his own interests to attend as he was seeking a refund of VAT.

We caused enquiries to be made which confirmed from file records that notice of the hearing on 10 August 2010 was sent by the tribunal to the Appellant at the Bridge Tavern on 23 June 2010.  The envelope in which the notice was sent was marked “if not delivered be returned to…” and there was inscribed the address of the forwarding tribunal office.  There was no evidence that the notice of hearing sent on 23 June 2010 had been returned to the Tribunals Service.  On the balance of probabilities we decided that the notice would have been delivered to the Appellant on or about 25 June 2010.

It was our decision that in any event the costs of the hearing of 10 August 2010 of the Respondents were to be paid by the Appellant.  It was our view that the notice had been served on the Appellant and that as a responsible businessman he should have had in place a procedure for receiving and recording correspondence.  The tribunal found it highly improbable that mail addressed to a sole proprietor at business premises would be dealt with in the manner outlined by the Appellant.  Matters of importance to his business, which could be time critical, could not, in our view, have been left in open view, unattended in a public bar where they could have been lost, damaged or destroyed.  We found the Appellant’s account highly improbable and accordingly found against him and ordered him to pay the costs of the Respondents of the hearing of 10 August 2010.  Those costs are to be agreed between the parties.  Failing agreement they are to be referred to a Taxing Master of the High Court for determination.

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.

JENNIFER TRIGGER
TRIBUNAL JUDGE
Release Date: 30 November 2010