FP Whiffen Opticians v Customs And Excise [2004] UKVAT V18951 (4 November 2004)

18951
OUTPUT TAX – Mixed supplies – Optician’s business – Amount to be properly attributed to standard rated supplies of spectacles – Proprietor, a dispensing optician, works full-time in business – Whether proper attribution can be based on proprietor’s drawings – VAT Act 1994 s.19(4)

LONDON TRIBUNAL CENTRE

	FP WHIFFEN OPTICIANS	Appellant

-	and –

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	STEPHEN OLIVER QC  (Chairman)

Sitting in public in London on 17 May 2002 (when John Brown CBE was a member of the panel) and on 11 October 2004

Alan Rashleigh, of Alan Rashleigh & Co, consultants, for the Appellant 

Philippa Whipple, counsel, instructed by the Solicitor for the Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2004

DECISION

1.	FP Whiffen, the Appellant, has been in business as an optician since he was registered in the 1980s.  He is a sole practitioner.  In that capacity he has been making VAT exempt and standard rated supplies. The VAT exempt supplies are his dispensing services; the standard rated supplies are his sales of spectacles, frames and lenses.  He appeals against an assessment made in November 2000 for the period 4/98 to 9/00 in the sum of £44,000 plus interest.  The assessment was revised downwards, in March 2004 (and some two years after the first day of this appeal), to £5,114.  Mr Whiffen has not withdrawn his appeal.  He claims to be entitled to repayment of £6,074.  

2.	Throughout the period covered by the assessment Mr Whiffen did not separate out the charges for the two services in his invoices to customers.  Nor did his books record them separately.  (The business provided exempt eye testing services.  These were carried out by third party ophthalmic opticians; the eye testing fees figured in Mr Whiffen’s books but appear to have been matched by payments out to the ophthalmic opticians and so can be disregarded for present purposes.)

3.	The sole issue in this appeal is the proper determination of the value of Mr Whiffen’s standard rated supplies of spectacles, frames and lenses. Because his invoices have not charged separately for exempt dispensing services and standard rated sales of spectacles, frames and lenses, each of the latter supplies is deemed by VAT Act 1994 section 19(4) to be for such part of the consideration (charged to the customer) “as is properly attributable to it”.  

4.	The factual background starts with Mr Whiffen’s original returns.  These were investigated by Mrs Jeanette Beard, an officer of  the Customs and Excise.  She gave evidence. She had visited Mr Whiffen’s premises in February 2000 and had discovered that Mr Whiffen had been apportioning his outputs (excluding eye testing receipts) on a 50:50 basis.  There was no evidence to support the attribution of 50% to standard rated supplies.  Mrs Beard wrote to Mr Whiffen asking for information to enable a proper attribution to be made.  In the absence of information enabling her to make a full costs apportionment, best judgment assessments aggregating £44,000 plus interest were made in November 1990.  The assessments were based on Mr Whiffen’s own figures for turnover.  The eye testing charges were extracted and the rest of the turnover was charged to VAT.  Mr Whiffen appealed on the grounds that the assessments were not to best of judgment and that the Commissioners’ calculations were not in accordance with accepted principles.  

5.	The practice of the Commissioners (since the Leighton’s decision and since the issue of an Information Sheet in June 1999) gives the optician a choice between (i) separating out standard rated and exempt elements at the point of sale and (ii) agreeing a method with the Commissioners.  The method said in the Information Sheet (8/99) to be preferred by the Commissioners, following consultation with a professional body, is described as “a full costs apportionment method”.  

6.	The Information Sheet recognises that section 19(4) does not require any particular method of apportionment to be made and that, in any event, the full costs apportionment method may require variation according to the circumstances of the optician’s individual practice.  The Information Sheet identifies the costs that fall to be brought into the reckoning when making the proper apportionment on the full costs apportionment basis.  These are:

(i)	Costs of goods, i.e. the costs, per set of spectacles dispensed in the period, of the bought-in frame, of the lenses, of in-house glazing, of delivery etc;

(ii)	Costs of  services of ophthalmic opticians, i.e. the proportion of the ophthalmic optician’s costs that are attributable to the dispensing service.  (This recognized that ophthalmic opticians may be performing separate exempt eye tests and that some of them may be attributable to managerial and other “overhead” activities.  As I understand the position, in Mr Whiffen’s practice ophthalmic optician “locums” dispensed during his absence (see a letter of 24 June 2002 from Alan Rashleigh & Co to the Commissioners) and

(iii)	Costs of dispensing opticians and of directly supervised persons.  

The Information Sheet goes on to specify as “direct costs” of ophthalmic opticians, dispensing opticians and directly supervised persons, as a non-exhaustive list items such as salary, national insurance and pension contributions, professional subscriptions, PII premiums and recruitment costs. The Information Sheet then sets out the method for making the full cost apportionment.

7.	The full costs apportionment, as specified in the Information Sheet, works well enough when all the actual costs of the dispensing practice can be identified.  It does not, however, purport to deal with the case where a sole practitioner or partnership of practitioners contribute their own services.  There will have been no direct costs of those dispensing optician services.  Instead, those dispensing opticians, as proprietors, take their profit at the end of the accounting period, possibly anticipating this by periodic drawings.  How then is a proper attribution exercise demanded by section 19(4) to be carried out when the owners work in the business as dispensing opticians?

8.	In 2001 Mr Rashleigh, Mr Whiffen’s adviser, produced a voluntary disclosure.  This confronted the question by seeking to treat all Mr Whiffen’s drawings as if they were the direct cost of his services as dispensing opticians.  The Commissioners do not accept this.  Drawings, they say, are not a proper basis for determining cost.  The drawings are, in effect, the profit of the business and have no necessary relationship with the time actually spent by Mr Whiffen, the owner, on the exempt business activity.  In any event, they say, the whole of the drawings cannot be attributed to the exempt business activity; Mr Whiffen must, the Commissioners say, have spent some time on the overhead activities of management and administration of the business.  

9.	Neither side has produced any authority for this point of principle.  It must be a common situation that an owner who works in his optician’s business does not keep separate records of exempt and standard rated supplies. The full cost apportionment method as described in the Information Sheet produces a proper attribution where the actual costs of all services are known, as where a third party such as a company owns the business.  But can a proprietor’s time and effort be costed so as to provide a figure for “costs” of services to be brought into the full costs apportionment?  If such a “cost” can be produced and it represents a reasonably sustainable compensation for the time and effort of the proprietor it should be used so as to produce a result that compares fairly with the situation where the third party owns the business.

10.	The voluntary disclosure has made the attribution on the following basis:

(i)	The cost of goods has been taken from Mr Whiffen’s accounts for the year ended 31 March 2000.  This amount is £81,538.

(ii)	The cost of services is shown as £72,935 for dispensing optician.  This more or less equates to the figure of trading profit (available as “drawings”) for the year, i.e. £73,285, less £2,522 being the amount for depreciation of motor vehicle, making £72,763. To the figure of £72,935 are added £12,951.75 (which is three quarters of the wages/fees for directly supervised persons) and £9,268 (being £2,242 for direct motor expenses, £5,890 for advertising and £1,136 for insurance) making £95,154.75 in all.

(iii)	From those amounts the voluntary disclosure works out the percentage of sales income liable to standard rate VAT, i.e. the consideration properly attributable to the supplies of spectacles and lenses.  £81,538 (cost of goods) as a proportion of £81,538 plus £95,154.75 (“cost” of services) is 46.15%.  Thus standard rated VAT is chargeable on 46.15% of  “sales” (leaving eye testing out of account).

11.	Following the first hearing in May 2002 the Commissioners sought more information from Mr Whiffen. The purpose was, as explained in a letter of 21 January 2003, “to establish the direct labour cost of the time spent by (Mr Whiffen) on dispensing”. This did not produce an acceptable reply so, on 13 February 2003, the Commissioners wrote again asking Mr Whiffen’s adviser to suggest “some other way of apportioning his costs/time to the exempt work”. The response of Mr Alan Rashleigh (Mr Whiffen’s adviser) was that 100% of Mr Whiffen’s time had been spent on the exempt activity.

12.	Following more correspondence Mrs Beard wrote enclosing a notice of assessment reduced to £5,114.  A comparator business had been used.  That business was apparently in the same region as Mr Whiffen’s.  The Commissioners could not, for confidentiality reasons, let Mr Whiffen know the name, address or proprietorship status (e.g sole trader, partnership or limited company) of the comparator business.  The taxable per cent shown by the calculations presented by the comparator business worked out at 64.75% for standard rated supplies.  The comparator business had, it was explained for the Customs, been used in exasperation and after years of asking for information from Mr Whiffen.  The 64.75% was, it was said, in line with other businesses.  

13.	The comparator business had worked out its “cost of goods” (per pair of spectacles) as £45,089.  The cost of services was shown as £16,469 (i.e. services of two part-time dispensing opticians paid £2,534 and £1,935 respectively and a “dispenser” paid £12,000).  639 pairs of spectacles had been dispensed in that year (1999): thus the cost of services per pair of spectacles dispensed was £24.99.  The aggregate cost of goods and services per pair being £70.85, £45.89 (being the amount attributable to the supply of spectacles and lenses) worked out at 64.75%.

14.	I am not satisfied that the comparator business’ figures has produced a reliable percentage for standard rated supplies to be applied to Mr Whiffen’s case.  I do not know how the comparator business is owned or whether the owner of the business works in it as a dispensing optician. The figures for that business show that dispensing opticians work in the comparator business, but that the aggregate of their salaries comes to only £4,500 for the year 1999.  This indicates a much smaller “input” into that business by dispensing opticians than Mr Whiffen’s input into his own business.  The letter from the Commissioners of 26 October 2003 to the accountant to the comparator business indicates that the taxable apportionment should be 48.2%. Despite the Commissioners’ attempts to put life into the redactions, I find too many unanswered questions about the comparator business.  I would need to know much more about the affairs of that business before being able to even begin to accept its percentage as reliable and relevant for the present circumstances.

15.	I am not satisfied from the evidence that I heard at the second hearing that Mr Whiffen worked exclusively as a dispensing optician.  He is proprietor of his own business.  As a rough estimate I would be inclined to regard him as having spent 20% of his time on overhead matters such as management and administration.  This means that 80% can be treated as time spent by him on dispensing.  The trading profit of Mr Whiffen’s business for the year ended 31 March 2000 is not, I fully recognize, a figure that is, as a matter of accounting, meant to reflect the cost of Mr Whiffen’s time.  And yet, looked at broadly, it was the reward for a year’s work put in by Mr Whiffen and 80% of that was dedicated to the dispensing optician’s activities.   Thus 80% of £72,935 is, I think, a sufficiently reliable figure to be used as the “cost” of Mr Whiffen’s time and effort in the year in question.

16.	Regarding the figure of £9,268 (i.e. the other expenses itemised in paragraph 10(ii)) the Commissioners question whether the whole amount is attributable to the dispensing optician activities.  The evidence from Mr Whiffen’s answers in cross-examination is all I have to go on.  They indicate to me that these are expenses of the dispensing optician business and do not relate to anything else.

17.	On that basis therefore I would, as presently advised, be inclined to adopt the “full cost apportionment” attached to the voluntary disclosure submitted on 16 November 2001 with the following changes.  Instead of £72,935 being attributable to “dispensing optician”, it should be 80% of that, i.e. £58,348.  This produces a “total cost” of services as £80,567 which makes the taxable element roughly 51%.  

18.	I give both sides 30 days from the release of this Decision to reach agreement on the figures based on my conclusions so far.  If either side wants further hearing they should notify the Tribunal accordingly.  

19.	In case the matter should become relevant, I mention that on the first day of the hearing, in May 2002, Mr John Brown CBE was sitting as a member of the Tribunal.  He was not present at the second day of the Hearing in October 2004.  His absence was because of an administrative error made by the Tribunal.  I decided to proceed without Mr Brown on the basis of what I understood to be the agreement of both parties.  I mention that Mr Rashleigh, who represented Mr Whiffen, has since written in to say that he felt pressurized into not objecting.  

20.	Finally, I see no compelling reason why any award of costs should not follow the event; which is that an assessment for £44,000 plus interest has, in the course of the appeal proceedings, been reduced to a small amount.

20.	For the above reasons I direct that the parties have 30 days in which to notify the Tribunal as to what, if any, further action is required from the Tribunal.

STEPHEN OLIVER QC
CHAIRMAN

RELEASED: 4 November 2004

LON/01/1351