John F Scott Ltd v Revenue and Customs [2005] UKVAT V19406 (22 December 2005)

19406
	VAT ASSESSMENT — optician — separate charges regime for mixed supplies of standard rated spectacles and lenses and exempt supplies of dispensing services — VAT Information Sheet 8/99 — Information Sheet not a statement of law — the Respondents entitled in law to issue the Assessment — no separate charge found as fact — evidence demonstrated that the Appellant charged a single consideration for mixed supplies — assessment not excessive — assessment upheld — appeal dismissed

MANCHESTER TRIBUNAL CENTRE

 
 	
	JOHN F STOTT LIMITED	Appellant

	- and -

THE COMMISSIONERS FOR
	HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

				Tribunal:	Michael Tildesley OBE (Chairman)
						Arthur Brown

Sitting in public in Manchester on 1 December 2005

Nigel Gibbon, solicitor, for the Appellant 

Rupert Baldry, counsel, instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents 

	© CROWN COPYRIGHT 2005

DECISION

The Appeal
1.	The Appellant was appealing against an assessment for unpaid VAT dated 16 December 2004 in the sum of £100,445 for the periods from 12/01 to 9/04 inclusive. Each period and the respective VAT due have been separately identified in the Notice of Assessment.
2.	The Notice of Appeal dated 7 January 2005 set out the following grounds of Appeal:
“The Appellant operates a business as an ophthalmic opticians. The Appellant accounts for output tax using the separately disclosed charges method.
Following the assurance visit the Commissioners have imposed the full cost apportionment method. According to the Commissioners’ own published guidance (Information Sheet 8/99) they have no power to do this if the separately disclosed charges method is applied correctly which is accepted by the Commissioners. In addition the assessment for period 12/01 is out of time”.
3.	At the hearing the Appellants withdrew the ground of Appeal dealing with the out of time assessment for period 12/01. 
The Issues in Dispute
4.	The Appellant company carried on a business as ophthalmic opticians. The Appellant contended that it was not liable to pay the assessment in the sum of £100,445 because it had accounted for VAT by making separate charges to patients for dispensing services and spectacles in accordance with the Respondents’ VAT Information Sheet 8/99 issued in June 1999.
5.	The Respondents, on the other hand, submitted that the Appeal was against an assessment for unpaid VAT. The onus was on the Appellant to demonstrate that the assessment was excessive. Further the Respondents disputed that the Appellant was making separate charges for dispensing services and spectacles. The true position was that the customer was paying a single sum under a single contract for the dispensing services and spectacles received from the Appellant. If that was so the single sum fell to be apportioned as was properly attributable to the dispensing services and spectacles.
6.	The issues to be decided by the Tribunal:
(1)	Were the Respondents entitled to raise an assessment?
(2)	 Did the Appellant make separate charges for dispensing services and spectacles?
(3)	Was the assessment excessive?
VAT Information Sheet 8/99, 22 June 1999
7.	The purpose of the Information Sheet was to provide opticians with guidance on how to apportion charges between supplies of spectacles and dispensing services. The former was standard rated for VAT purposes, whilst the latter was exempt from VAT. The supply of spectacles by an optician will normally consist of a mixture of exempt dispensing services and standard rated frames and lenses. 
8.	The guidance provided that from the beginning of the first VAT accounting period starting on or after 1 January 1998, opticians either had to use an apportionment method that had been individually agreed with their local VAT business advice centre or make separate charges for the spectacles and dispensing that were to be disclosed to each patient at the time of sale. The Respondents had no preference as to which of the two arrangements individual opticians should adopt.
9.	Annex B of the Information Sheet gave guidance about the criteria that need to be satisfied to establish a true separation of charges:
“Opticians will not be required to perform an apportionment of charges for spectacle sales if they make separate charges for the spectacles and dispensing, thus establishing a separate consideration for each of the supplies. One of the normal criteria for establishing separate considerations is that customers should be able to obtain the supplies separately at the individual specified charges should they so wish. This is not usually possible with dispensing services which are normally “tied” to the supply of spectacles. Customs have therefore relaxed this requirement and will accept that separate considerations have been established for the spectacles and dispensing if the charges for each are stated and made known to all patients at the time of supply.
Customs do not consider that separate considerations have been established where –
the costs of each supply and the final charge to the patient are recorded in the optician’s accounts but only a single charge is disclosed to the patient; or
separate charges are only disclosed to those patients who request the information.
If patients are informed of the charge for each supply, Customs do not require the optician to reveal how much of each charge is attributable to the cost of the supply and how much is profit or “mark up”. Nor do Customs require the charges to be disclosed by any particular method. However, whatever method of notifying the patient is adopted, the optician must be able to satisfy the local VAT business advice centre that the information is actually being conveyed to all patients, whether they have requested it or not”.
The Legislation
10.	 Section 19 of the Value Added Tax Act (hereinafter referred to as VATA) 1994 deals with the determination of value of supplies of goods or services. The relevant subsections for this Appeal are:
Section 19(2) which provides that
“If the supply is for a consideration in money its value shall be taken to be such amount as with the addition of the VAT chargeable is equal to the consideration”.
Section 19(4) which provides that 
“Where a supply of any goods or services is not the only matter to which a consideration in money relates, the supply shall be deemed to be for such part of the consideration as is properly attributable to it”.
11.	Section 73(1) of VATA 1994 deals with the Respondents’ power to raise assessments for VAT:
“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”.
The Evidence
12.	We heard evidence upon oath from Robert Brown, Director of the Appellant company. We received a bundle of documents which included a witness statement of Brian Horton, an Officer of HM Revenue and Customs, who visited the Appellant’s premises at Salford on the 24 August 1999 and 12 October 1999 to deal with the changes arising from the Information Sheet 8/99.
The Facts
13.	The Appellant carried on a business as ophthalmic opticians. It has five branches trading as Stotts Opticians in Swinton, Umston, Partington and Unsworth and trading as Sutcliffes Opticians in Chorley. The Appellant employed 40 staff, nine of whom were qualified optometrists, one qualified optician and two laboratory technicians.
14.	The Appellant provided its patients with whole eye-care strategy involving examination, general healthcare advice and ultimately supplies of spectacles and contact lenses. Professional qualified members of staff carried out the examinations and performed the dispensing services.  The Appellant company distinguished itself from the High Street Optician multiples by its use of professionally qualified staff. The Appellant did not permit non-professionally qualified staff to dispense spectacles or contact lenses. As a result its costs of dispensing and unit costs were higher than the High Street multiples with its dispensing ratio lower than the multiples. Many of its patients were repeat patients, including several generations of the same family.
15.	A higher proportion of the Appellant’s business focussed on examination services rather than dispensing. Many of the examinations carried out by the Appellant did not lead to the dispensing of spectacles. The Appellant lost money on its examination services, particularly in light of the fixed low level fee for National Health Service eye examinations. A patient purchasing spectacles would, therefore, pay a higher proportion of cost for the dispensing services. The Appellant participated in shared health schemes with  local Primary Care Trusts dealing with the diagnosis of diabetes and cataract referral management. The partnership with the Primary Care Trusts reflected the Appellant’s emphasis on the clinical side rather than the prescribing side.
16.	The Appellant had a small counter business selling spectacle cases, chains, solutions and crude magnifying glasses which did not require a professional input. It also sold spectacles direct from its laboratory to other opticians which were standard rated for VAT purposes.
17.	Spectacle frames were displayed in the shops, some of the frames had prices on but generally the frames and the lenses were sold as a bundle. The Appellant bought in all the frames. The cost of the frames ranged from £1.20 to £120. The bulk of spectacle frames dispensed cost in the region of £3 to £4. The Appellant never sold spectacles unless it provided dispensing services. 
18.	Patients would not be given a price for the purchase of spectacles when they first entered the shop. The Appellant instead would sit down with its patients, discuss their needs and dispense accordingly. The dispensing was a complex procedure, particularly with the choice of lens, for example the Appellant dispensed 250 types of varifocal lens. After the end of the dispensing the Appellant informed the patient of the single total price of the selected frame, lenses and dispensing services. If the patient found the total price too expensive, the Appellant would attempt to find him a cheaper package. Once the Appellant and the patient reached agreement on the total single price of the package, the Appellant would order the spectacles and enter the transaction into its accounting system. At the point of order the Appellant did not give written details of the price of the spectacles unless it was asked for by the patient. The patient would return to the Appellant’s premises to collect the ordered spectacles which would then be fitted. The Appellant would pay for the spectacles and be given a VAT supply statement.
19.	The Appellant produced two series of VAT supply statements. The first series operated until November 2002 which was replaced by a second series on the introduction of a new computer system. The first series consisted of a single form, entitled VAT supply statement, upon which was the Appellant’s business address, date and the following entries:
Examination Fee (Exempt Rate)	
Contact Lenses (Exempt Rate)	
Contact Lenses (Standard Rate)	
Spectacles Dispensing (Exempt Rate)	
Spectacles (Std Rate)	
Total	

The Appellant would insert the separate price against each of the entries.
The second series consisted of three separate statements. All the statements contained the Appellant’s address, date, reference number and the patient’s name and address. There was, however, a separate statement for spectacles, contact lenses and examinations. The spectacles’ form contained three entries: spectacles dispensing (standard rate), spectacles dispensing (exempt rate) and total. The contact lenses form also contained three entries: contact lenses (standard rate), contact lenses (exempt rate) and total. Likewise the examination fee form had three entries: examination fee (standard rate), examination fee (exempt rate) and total. Against each of the entries in the respective forms the Appellant would enter the total price, which was then broken down between the other two entries on the respective form.
20.	Prior to the year 2000 the Appellant accounted for VAT on an apportionment basis. In December 1997 the Appellant’s accountants agreed with the Respondents a costs apportionment method for the sale of spectacles comprising 32.77 per cent for the standard rated element for the frames and lenses. No apportionment was necessary for solutions and sundry sales which could easily be identified at point of sale and all sales were standard rated. The VAT treatment of contact lenses would be on the basis of costs uplifted by a 28% margin.
21.	In Autumn 1999 Mr Horton, Officer of HM Revenue and Customs, carried out several visits of the Appellant’s premises. Mr Brown’s recollection of the visits was that Mr Horton suggested the use of the “separate charges” method of accounting for VAT and approved the format of the VAT supply statement showing the separate charges. Further Mr Brown suggested that Mr Horton approved the 80/20 split for exempt and standard rated separate charges. 
22.	Mr Horton in his witness statement dated 12 September 2005 stated that Mr Brown told him that from 1 January 2000 that the Appellant company would introduce the separately disclosed charges method. Mr Horton had no recollection of a fixed 80/20 apportionment for the separately disclosed charges being discussed or agreed. Mr Horton produced two letters written to the Appellant. The first was dated 10 December 1999 where Mr Horton stated that 
“if you wish to use the separately disclosed charges method as detailed in Annex B (VAT Information Sheet 8/99) (our italics) please provide details of the proposed receipt”.
The second letter of 27 October 2000 stated that
“Your proposal to separately disclose charges to your customers has been approved, the Commissioners approve your proposal from the 1 July 2000.
Please ensure that a receipt (statement) is issued to all customers (NHS and private) and that each receipt (statement) shows the individual specified charges (ie eye examination, sundries, supply of spectacles and the supply of professional services) as detailed in Annex B of the VAT Information Sheet 8/99.
Copies of these receipts must be kept as they form part of your accounting system.
Repairs, solutions, sundries and sunglasses should be accounted for separately as fully standard rated items”.   
23.	Mr Brown acknowledged in his evidence that Mr Horton disagreed with his recollection about the 80/20 split and that nothing was put in writing. However, Mr Brown was adamant that Mr Horton stated that the Appellant could use any prices it liked for the separate charges scheme but that there was a fine line between minimising tax liability and tax evasion.
24.	 The Appellant used an 80/20 split for calculating the separate charges for exempt and standard rated supplies respectively. The 80/20 split was derived from the Appellant’s Trading and Profit and Loss Accounts by calculating the proportion of “cost of sales” to the “sales” figures which worked out at 20 per cent. The Appellant took the 20 per cent as the proportion of the VAT standard rated element in mixed supplies of exempt services and standard rated goods.
25.	On 1 April 2004 Mrs Akpinarlioglu, Officer of HM Revenue and Customs, visited the Appellant. She considered that the Appellant had under declared its liability to output tax based upon the following findings:
(1)	The input tax claimed on taxable purchases for periods 06/01 to 12/03 was £172,257, the output tax declared over the same period was £141,093.
(2)	The 80/20 split used the turnover figure in the accounts which included wholly exempt and wholly standard rated charges. The cost of sales figure excluded the labour costs of ophthalmic opticians.
26.	On 27 May 2004 the Respondents advised the Appellant of its findings and concerns and requested the Appellant to review its returns for the periods 06/01 and 12/03 and submit evidence in support of its claims or propose an alternative basis for calculating output tax. The Appellant insisted that it had correctly applied the separately disclosed charges method and that 80/20 split represented the separate charges. The Respondents carried out a further examination of the Appellant’s records and decided on 16 December 2004 to issue an assessment for unpaid VAT in the sum of £100,445 for the periods 12/01 to 9/04 inclusive. The assessment was calculated on the cost based apportionment method which had been used by the Appellant prior to the year 2000.  
Our Reasons
Were the Respondents entitled to raise an assessment?
27.	 The Appellant challenged the issue of the assessment on the ground that it had complied with the Respondents’ VAT Information Sheet 8/99 in respect of the “separate charges” option. Whether the Appellant has operated a separately disclosed charges scheme was a question of fact which we deal with later. The Respondents’ power to raise an assessment was governed by section 73 of the VATA 1994.  The Commissioners may assess the amount of VAT if it appears to them that the VAT returns were incomplete or incorrect. In this Appeal Mrs Akpinarlioglu formed the view that the Appellant’s returns were incorrect because they showed a significant excess of input tax over output tax. Mrs Akpinarlioglu believed that the excess was an indicator of an under valuation of the standard rated element of dispensed sales. The Appellant did not contest that the returns displayed a significant excess of input tax. 
28.	We find that the Respondents met the requirements of section 73 VATA 1994 enabling them to issue the assessment dated 16 December 2004. 
Did the Appellant make separate charges for dispensing services and spectacles?

29.	The Appellant submitted that it had met the requirements of Annex B of VAT Information Sheet 8/99. Thus it was entitled to account for VAT on the basis of the separate charges disclosed to its patients. The Appellant was complying with section 19(2) of the VATA Act 1994 in that the separate charges represented the consideration paid for each element of the service or goods supplied by the Appellant. 
30.	The Appellant relied upon the wording of Annex B which stated that the Respondents would accept that separate considerations have been established for the spectacles and dispensing if the charges for each were stated and made known to all patients at the time of supply. Further the Respondents would not require the optician to reveal how much of each charge was attributable to the cost of the supply and how much was profit or “mark-up”. Nor would the Respondents require the charges to be disclosed by any particular method. The Appellant considered that it fully met these requirements by the issue of the VAT statement which disclosed the separate charges and was given to its patients when they paid for the spectacles, contact lenses or eye examinations.  
31.	VAT information sheets are not statements of law. They are issued under the Respondents’ care and management powers with respect to their responsibilities for the collection of VAT. The Information Sheets provide guidance to traders. The Tribunal has no appellate jurisdiction over the exercise by the Respondents of its care and management powers. In this Appeal we are concerned with the assessment issued on 16 December 2004 with the onus upon the Appellant to show on the balance of probabilities that the assessment was either not to best judgment or excessive or both.  Thus there is an argument that this dispute between the Appellant and the Respondents about the application of VAT Information Sheet 8/99 was not within the Tribunal’s jurisdiction to determine. We have decided, however, to resolve the dispute about separate or single charges.  Respondents’ Counsel did not resist the Appeal on the basis that we had no jurisdiction, although he reminded us that the Appeal was against an assessment. The more compelling reason for dealing with the dispute over separate or single charges was whether the consideration for the Appellant’s supplies was fixed either by the requirements of section 19(2) or section 19(4) of the VATA 1994. This was clearly a dispute of law within our Appellate jurisdiction and depended upon whether the Appellant made separate charges or a single charge for mixed supplies of exempt services and standard rated goods.
32.	The question whether the Appellant was making separate charges or a single charge for its mixed supplies of exempt services and standard rated goods was one of fact based upon a factual assessment of the transactions conducted by the Appellant. We are not bound by the Respondents’ interpretation of what constituted separate considerations as set out in Annex B of VAT Information Sheet 8/99.  Mr Brown’s evidence demonstrated unequivocally that the Appellant conducted its negotiations with its patients on the basis of a single total price for its mixed supply of spectacle frames, lenses and dispensing services. When the patient chose his spectacles, he was told the total price for the mixed supply not the separate charges for the goods and the professional services. When the patient ordered the spectacles, he did so on the basis of the single total price quoted by the Appellant. The time of ordering fixed the contract for the sale of the spectacles and other services. Thus the single total price formed the consideration for the contract between the Appellant and its patients. The only time that the patient may have got to know about separate charges for the spectacles and professional services was when he was given the VAT supply statement on payment of the spectacles. This statement consisted of an allocation of the single total price between two elements of the mixed supply. The allocation was never discussed with the patient during the transaction. Mr Brown gave no evidence that the Appellant’s staff ever explained the allocation or its basis to the patients. The allocation was not part of the contract between the Appellant and its patients. The Appellant unilaterally made the allocation once the sale had been completed. 
33.	The VAT supply statement issued by the Appellant to its patients did not in our view clearly indicate an allocation between the respective supplies of professional services and goods. The first and second series of the VAT statement for contact lenses simply stated contact lenses (exempt rate) and contact lenses (standard rate). A patient would not discern from these descriptions that he was being charged separately for professional services and goods. Likewise with spectacles, the first series stated spectacles dispensing (exempt rate) and spectacles (standard rate) whilst the second series had spectacles dispensing (standard rate) and spectacles dispensing (exempt rate). Mr Brown acknowledged that the second series document did not distinguish between the supply of goods and services.  He said that this was due to an input error when the Appellant transferred to a new computer system. However, the fact that this error had not been spotted until the hearing some three years after the transfer undermined the valued placed on these documents by the Appellant to demonstrate the existence of a separate charges regime. We are satisfied that these documents by their very name and contents would not convey to the Appellant’s patients that they were being charged separately for goods and services. Further, they did not represent how the Appellant negotiated and contracted with its patients which were on the basis of single total price. 
34.	  We find that the Appellant operated a single charge system for mixed supplies of spectacle frames, lenses and professional services. The Appellant did not make separate charges for goods and services. We make this finding of fact on the evidence not on the basis of whether the Appellant complied with the requirements of VAT Information Sheet 8/99.  As explained previously the Information Sheet does not bind us because it is not a statement of law. Likewise the advice given by Mr Horton to the Appellant was not relevant to our determination of the factual position regarding the Appellant making single or separate charges.
35.	The provisions of section 19(2) of the VATA 1994 do not apply in view of our finding that the Appellant was making single charges for mixed supplies of exempt dispensing services and standard-rated frames and lenses. The applicable provision is section 19(4) of the VATA which requires the apportionment of the single consideration between the respective supplies of services and goods. The criterion for deciding the apportionment is that part of the consideration as is properly attributable to the respective supply. 
36.	The Appellant accounted for VAT on that basis that 20 per cent of each sale represented the supply of standard-rated spectacle frames and lenses and 80 per cent represented the exempt supply of dispensing services. The Appellant derived the percentages from the comparison of costs of sales to total sales as declared in its profit and loss accounts. The Appellant, however, did not use the 80/20 split to support an apportionment method for VAT accounting but to justify its scale of separate charges. As we have found against the Appellant on the issue of separate charges we consider that the 80/20 split can be disregarded for apportioning the single consideration between respective supplies of services and goods. We are satisfied that the 80/20 split would not produce a fair and reasonable result because its methodology incorporated the costs of wholly exempt and wholly standard rated supplies and excluded direct labour costs with the result that the input tax claimed exceeded the output tax declared by a significant amount.
37.	The Respondents have proposed that the apportionment should be calculated using the costs based method previously adopted by the Appellant and agreed by the Commissioners. Under this method 32.77 per cent of the sale price was allocated to standard rated supplies of spectacles and lenses with 67.23 per allocated to exempt supplies of dispensing. We are satisfied that the Respondents’ proposal produced a fair and reasonable result as it was derived by the Appellant’s accountants using direct costs associated with the particular supplies. The Appellant did not make an alternative suggestion for us to consider. We, therefore, decide that 32.77 per cent of the single consideration for the mixed supply of spectacle frames, lenses and dispensing services can be properly attributable to the standard rated supplies in accordance with section 19(4) of the VATA 1994.
Was the assessment excessive?
38.	The Respondents computed their assessment using the costs based method previously adopted by the Appellant on the relevant figures disclosed in the Appellant’s books and records. The assessment, therefore, used current figures and a recognized previously adopted methodology to arrive at the VAT due. The Appellant’s representative indicated that he would not challenge the quantum of the assessment if his client was unsuccessful with the separate charges argument. We find that the assessment was not excessive. Thus we uphold the assessment in the sum of  £100,445 for the periods from 12/01 to 9/04 inclusive.
Summary of Our Findings
39.	We find the following:
(1)	The Respondents were entitled in law to issue the assessment dated 16 December 2004.
(2)	The Appellant made a single charge for mixed supplies of standard rated supplies of spectacle frames and lenses and exempt supplies of dispensing services.
(3)	32.77 per cent of the single consideration for the mixed supply of spectacle frames, lenses and dispensing services can be properly attributable to the standard rated supplies in accordance with section 19(4) of the VATA 1994.
(4)	The assessment was not excessive.
(5)	The assessment in the sum of £100,445 for the periods from 12/01 to 9/04 inclusive is upheld.
Our Decision
40.	In view of our findings, we dismiss the Appeal. We make no order for costs.

1.	

MICHAEL TILDESLEY
CHAIRMAN
Release Date: 22 December 2005
MAN/05/0016