18652

Value added tax – best judgment assessment- whether the assessment had adopted a proper approach to the exclusion of wasted stock - yes 

LONDON TRIBUNAL CENTRE

	DAVID GEOFFREY KYLE and MALCOLM ALBERT SNELLING
          (TRADING AS ARKWRIGHTS SOCIAL CLUB)	          Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	 Dr David Williams  (Chairman)
						 Mrs C Farquharson B.Sc, ACA (Member)

Sitting in public in Lowestoft on 11 February 2004

Mr G R Davey, CTA  for the Appellant

Miss Caroline Neenan of counsel for the Respondents

© CROWN COPYRIGHT 2004

DECISION

1	This appeal concerns additional assessments made by the respondents against the appellants for the period from 1 February 1999 to 31 January 2001. The questions before the tribunal were the proper amount of that assessment, and the interest on it.

The issues

2	The original additional assessments were for £7,152 plus interest. These were revised after discussions between the parties to sums totalling £4,752 plus interest. During the oral hearing that gap narrowed further, and it was accepted by the parties that the tribunal need only give a brief decision dealing with the points accepted, and deciding the one point that remained in issue. 

3	At the oral hearing, Mr Davey for the appellants accepted that there were grounds for an additional assessment, and that the use of the “best of judgment” power was not in issue. But he contended that the sums assessed were too high for two reasons. One was an error in the sum taken as declared sales. The other was the level of wastage in his clients’ business. By the end of the hearing, only the issue of wastage was in issue, so we deal with that more fully.

Wastage

4	It is necessary to record why wastage became relevant to the VAT assessment. The appellants handle bar sales and services at a club. Their business is therefore sales of beers, wines, spirits and related products. During a visit to the appellants by the respondents it became clear that the tills were, for mechanical reasons, not producing readable till roll records and that the usual “Z” readings were not available. The respondents formed the view that in the absence of this direct evidence they would be safer relying on an independent stocktake record made available by the appellants, together with a mark-up exercise based on invoices produced, as the basis for checking gross takings.  To make this accurate, stock wastage had to be deducted from stock before calculating total estimated sales based on marked-up purchases.

5	As the nature of wastage was in dispute before the tribunal, as well as its quantity, the tribunal records its acceptance of the evidence that, as with any sale of draught beer, there was bound to be wastage such as the beer lost in pipe cleaning, drip trays, barrel ends and so forth, and that a minimum level of wastage from draught beer would be unavoidable. It is also likely that there would be some wastage with broken bottles and spillages from bottles in connection with bottled drinks, although that is not inevitable.   

6	The respondents accepted that there would be wastage. But, based on figures in the independent stocktake, they put the figure originally at 1.57%. For their part, the appellants accepted that they could not produce detailed wastage figures for the first years of their business, but contended that that figure related to pipe cleaning losses only. Based on later figures, Mr Davey submitted that the wastage rate was now much more closely monitored, and proved to be 4.3%. Rounding this, he contended that the wastage rate that the tribunal should accept was 4%.

7	The respondents pointed to the agreement recorded by their officer Mrs Randall (who gave evidence to us). In her contemporary note of a meeting on 19 April 2002, she recorded:
“Overall mark up on current stock takers report 102% compared to 108% on assessment – wastages as a percentage of sales is 1.73% compared with 1.57% on the original stock takers report.”
The respondents revised their assessments accordingly, and relied on 1.73% both as the agreed figure and as a reasonable figure for that kind of trade.

8	Having heard from both parties, the tribunal concludes that some of the difference between the parties lies in a lack of clarity about precisely what was being measured as wastage and as against what. From its nature, wastage is stock purchased but not sold. The question is therefore how much stock was properly purchased for the business but properly not sold for the business. On this basis wastage can be measured either against purchase figures or against sales figures. The agreement based it on sales figures. There might of course be timing differences hidden in this choice, but those differences should even out over a period. Another area of doubt is whether wastage is measured against total sales (or purchases) or only against sales (or purchases) of the kinds of goods subject to the wastage. Any of these is valid if applied consistently. In this case, the inevitable loss on pipe cleaning, drip trays and so forth related largely to sales of draught beer, and wastage was much lower for other kinds of sales. But the agreement adopted the basis of total wastage measured against total sales.

9	The tribunal finds that the evidence and submissions of Mr Davey are based on purchases, not on sales, and his client’s evidence emphasised the level of wastage against specific products rather than total stock. On his basis, the argument that there was a 4% or higher wastage level – of draught beer, or as measured against wasted purchases rather than lost sales - might be right, but that is not the basis of the agreement nor of the approach taken in the assessments. The tribunal find that the assessments adopted the terms of the agreement and that the basis of that agreement that wastage was 1.73% of total sales was consistently applied. It also finds that the percentage of 1.73% of total sales is entirely appropriate on the evidence. 

10	The tribunal tested this against the evidence of detailed stock figures produced at the hearing. These stock figures related to the second half of 2003, so are not directly relevant to the period in dispute. To take one month at random in that period, the audit showed deliveries at cost of £7,669 and cash sales of £16,341. Allowances are monitored at £126 for pipe cleaning, £211 for drip trays, and nil for bottoms and breakages. Mr Davey presented that as a wastage rate of £337 as against purchases of £7,669, a rate of 4.4%. But it could equally be presented as a wastage rate as against total sales of £16,341, in which case the wastage rate is 2.1%. The latter, not the former, reflects the approach used in the agreement and by the respondents. As that was one of the higher wastage rates recorded in recent months, and taking into account the timing point noted above, the tribunal sees no reason to question 1.73% either as the agreed figure for wastage against total sales or as a soundly based figure. 

11	The tribunal therefore rejects that basis for challenging the respondents’ assessment.

The sales recorded

12	The tribunal can deal with the other matter disputed by Mr Davey briefly, as the respondents conceded that they would accept the appellants’ contentions. In the figures on which the assessments were based, net sales declared were taken as £200,579 for the period as against expected sales of £217, 535. From that difference an error rate of 8.45% was calculated. The appellants contended, and the respondents accepted, that the total sales declared were £204,112. We so find. This reduces the shortfall of sales from £16,955 to £13,423. 

13	The additional assessments were based on an error rate of 8.45% calculated from these figures (a shortfall of £16,955 as a percentage of recorded sales of £200,579). The tribunal find that the error rate should be 6.57% (£13,423 as a percentage of £204,112). 

Decision on the amounts assessed

14	As agreed by the parties, the tribunal directs the respondents to revise the 
assessments for the period to reflect an error rate of 6.57% in each period. In all other respects, those assessments are confirmed by the tribunal. 

Interest

15	At the close of the hearing Mr Davey raised a new issue, namely the interest to be added to the assessments and to be paid by his clients. The tribunal notes that interest is payable only because the appellants have not yet paid the additional VAT raised under the assessments or any part of it. The respondents are not only entitled but required by law to add interest to an amount of VAT assessed and not paid if the conditions of section 74 of the Value Added Tax Act 1994 apply. The appellants raised no specific ground within section 74 to remove or reduce the amount of interest to be imposed and, on the evidence before it, the tribunal could see none. The assessments in each period followed returns made for that period, so engaging section 74(1)(a). However, the amount of interest will need to be recalculated to reflect the reduction in the amount of VAT to be assessed as directed in this decision. The tribunal also direct that this be done.  Subject to that, the interest charges are confirmed. 

DR DAVID WILLIAMS
CHAIRMAN

RELEASED:16/05/2004

LON/03/0448