19923
VAT ASSESSMENT: Appellant partnership running sub post office and general store – value of standard rated sales low when compared with annual accounts and the value of standard rated purchases – Appellant asserted that the VAT declared was correct – the Appellant’s systems and processes for calculating VAT were flawed and unreliable as a consequence understated the value of standard rated supplies – 12/03 and 2004 returns more reliable – assessment determined on a percentage value of 51 per cent for standard rated supplies – Appeal dismissed.

LONDON TRIBUNAL CENTRE

	PETER AND LINDA KEMP	Appellant

	- and -

	HER MAJESTY’S REVENUE and CUSTOMS	Respondents

			Tribunal: MICHAEL TILDESLEY OBE	 (Chairman)
				      ANGELA WEST FCA		  (Member)

Sitting in public in Cardiff on 19 October 2006

Mr Kemp appeared in person for the Appellant

Pauline Crinnion, Advocate for HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2006

DECISION
The Appeal
1.	The Appellant was appealing against an assessment for VAT in the sum of £11,822 plus interest of £1,245.63 for the periods 07/01 to 12/03 dated 22 June 2004. 
2.	Following the receipt of further information from the Appellant, on 12 January 2005 the Respondents amended the assessment to £10,285 plus interest of £1,496. 
3.	On 22 March 2005 the Respondents revised the amended assessment using the Appellant’s accountant’s figure of 51 per cent which reduced the amended assessment by £286. The Appellant disagreed with the revised assessment. In those circumstances the Respondents maintained the amended assessment of £10,285.
4.	The Appellant’s grounds of Appeal were:
(1)	The Officer who originally visited the trading premises was not, as a result of a misunderstanding, presented with a record of the business sales. This information has since been forwarded to VAT Appeals and Reconsideration Team Wales Region.
(2)	The assessment does not reflect the sales actually made and profit margins generated during the period under consideration.
The Dispute
5.	The Appellant carried on business as a sub post office and general store from premises at 55 St Mary Street, Risca, Newport, Gwent, NP11 6GF. The Appellant traded as a partnership of Peter and Linda Kemp.
6.	On 12 March 2004 the Respondents undertook a VAT assurance audit of the Appellant’s business. The Respondents concluded that the Appellant’s standard rated sales as declared in its VAT returns were understated. The Respondents considered that the relative percentage between standard and zero rated sales in the Appellant’s VAT returns was low when compared with the relative percentage of standard and zero rated purchases. The Respondents performed an assessment calculated on the percentage of standard rated purchases to total purchases set against the value of sales during the specific VAT period, which showed that the Appellant had under-declared its VAT liability.
7.	The Appellant maintained that the VAT declared in its returns was derived from its actual sales figures and was correct. In the Appellant’s view the Respondents were effectively using a hypothetical mark up scheme to justify their assessment. The mark up scheme bore no relationship to the actual profit margins achieved by the business.
8.	The task for the Tribunal is to decide the correct amount of VAT due for the VAT periods from 7/01 to 12/03 inclusive. The obligation is upon the Appellant to demonstrate on the balance of probabilities the correctness of its calculation for the VAT due for the said period.
The Evidence
9.	We heard evidence from Mr Kemp, one of the partners, for the Appellant, and Mrs Wilcox for the Respondents. Mrs Wilcox carried out the VAT assurance audit of the Appellant’s business. The witness statement of Mrs Thomas of the Respondents’ Appeals and Reconsideration Team was admitted into evidence, as there were no objections from the Appellant. Mrs Thomas conducted the reviews of Mrs Wilcox’s original assessment following receipt of additional information from the Appellant’s accountants. A bundle of documents prepared by the Respondents was also received into evidence.
Findings of Fact
10.	We make the following findings of fact:
(1)	In April 2000 Mr and Mrs Kemp bought the post office and general store in Risca, which was some eight miles outside Newport, South Wales. They operated the business as a legal partnership.
(2)	Mr Kemp had been previously employed in the retail sector. He was a manager of TNS stores. Mr Kemp kept the books for the Appellant’s business and prepared its VAT returns.
(3)	 The business comprised a small post office with a two position counter and a general store selling principally newspapers, magazines, confectionary, cards and selected groceries. The store was open seven days a week. The opening hours were 6am to 6pm Monday to Saturday, and 6am to 12.30pm on a Sunday. The business was in competition with neighbouring supermarkets, which included Morrisons, Lidl and Aldi.
(4)	On the takeover of the business the Appellant inherited a till which had four departments: confectionary/stationery goods, tobacco goods, newspapers, and groceries (non-VATABLE). Groceries which were subject to VAT would be recorded in the first department of confectionary/stationery. 
(5)	The till was generally operated by part-time staff employed by the Appellant since Mr Kemp spent the majority of his time running the post office. The part-time staff received rudimentary training in the VAT status of the various goods on sale.  The training consisted of a basic introduction in the till operation with Mr Kemp supervising new members of staff during their first days of employment.
(6)	In September 2003 the Appellant purchased a modern till which had eight departments: confectionary, tobacco, stationery, phone, newspapers, groceries, stamps, and service. The new till enabled the Appellant to record a more accurate description of the sale category, and its VAT treatment.
(7)	Using the Appellant’s sales figures for the ten quarterly periods (7/01 to 09/03) in which the old till operated, the average sales figure per quarter for confectionary/stationary department was £9,228 (13 per cent of average total sales per quarter), and £11,198 (16 per cent of total sales) for groceries. The respective sales figures for the quarterly period (12/03) in which the new till operated were £11,638 (15 per cent of total sales) for confectionary and stationery departments, and £10,551 (14 per cent of total sales) for the groceries department.  
(8)	The average proportion between standard rated and zero rated sales in the periods covered by the old till was 49.5 per cent to 50.5 per cent. The respective proportion for standard and zero rated sales recorded by the new till in the quarter 12/03 was 52 per cent as against 48 per cent.
(9)	Mr Kemp took recordings of the gross-takings, twice weekly on Wednesdays and Saturdays. However, he did not use the till Z readings for calculating the value of the standard rated sales. Instead Mr Kemp adopted his own method which was to add together the bankings for each day plus  cash payments made out the till for bills from which he deducted the till roll readings for zero-rated sales to arrive at the value for standard rated sales. The calculations were then entered into a sales book twice weekly and a VAT book, from which the VAT quarterly return was prepared.
(10)	When Mr Kemp or the Appellant’s employees paid a bill from the cash in the till, a written record was supposed to be kept to enable Mr Kemp to perform the calculation for standard rated sales. 
(11)	Mr Kemp did not retain the till rolls for the periods 07/01 to 09/03. He was under the impression that he was under no obligation to retain them. When Mr Kemp worked for TNS the till rolls were destroyed following stock takes. 
(12)	On 21 March 2005 the Appellant’s accountant’s supplied the Respondents with the percentage of standard rated purchases and sales for the period 1 April 2004 to 31 December 2004 which was 56 per cent and 51 per cent respectively. The percentages were obtained from the Appellant’s purchase and sales records and the Z readings on the till rolls.
(13)	The Respondents carried out a separate enquiry into the Appellant’s partnership tax return for the year ending April 2003 which resulted in various adjustments to the assessable profits with the Appellant paying an additional sum of £9,800 in income tax and national insurance.  The principal reason for the adjustments was that the Appellant did not account for own use of specific expenditure items.
(14)	The Respondents’ VAT assurance visit to the Appellant’s business was prompted by an apparent discrepancy between the declared standard rated sales for the Appellant and its annual accounts which suggested that the standard rated sales had been under-declared.
(15)	Mrs Wilcox compared the percentage of standard rated sales against total sales with the percentage of standard rated purchases against total percentages, using the Appellant’s own recorded figures. This comparison highlighted significant differences between the two percentages. The standard rated purchases for resale were approximately 62 per cent of the total purchases for the year ending 30 April 2002 and 58 per cent for the year ending 30 April 2003. The respective percentages for standard rated sales were 50 per cent for 30 April 2002 and 46 per cent for 30 April 2003.
(16)	Mrs Wilcox concluded from the comparison that the percentages for standard rated sales were unrealistic. If they were correct, the Appellant would not have made any profit on standard rated sales. Mrs Wilcox formed the view that the Appellant had under-declared the VAT due. Mrs Wilcox performed a VAT calculation based on the proportion of standard rated purchases to total purchases in a specific quarterly VAT period which was then applied to the total sales figure for that period. Mrs Wilcox repeated this exercise for each of the quarterly periods from 07/01 to 12/03 inclusive. The outcome of the calculation was that the Appellant owed £11,822 in unpaid VAT.
(17)	   Mrs Wilcox invited the Appellant to review her findings and calculations and respond within 14 days. No response was received with the result that Mrs Wilcox issued an assessment in the sum of £11,822. 
(18)	Between 28 July 2004 and 23 December 2004 the Appellant’s accountants made a series of written representations on Mrs Wilcox’s assessment to the Respondents’ Appeals and Reconsideration Team based at Chester. Essentially Mrs Thomas considered the correspondence and ultimately decided on 12 January 2005 to reduce the assessment by £1,537 so as to allow 2.5 per cent for wastage occasioned by write off and theft of stock.
(19)	On 21 March 2005 the Appellant’s accountants sent a letter in which they stated that the Appellant was insistent that the Respondents’ assessment was inaccurate.  Further the percentage of standard rate sales in the Appellant’s business for the period 1 April 2004 to 31 December was 51 per cent. The percentage was derived from the Z readings on the till roll and the Appellant’s purchase and sales ledgers. 
(20)	Mrs Thomas recalculated the revised assessment using the figure of 51 per cent as the percentage of standard rated sales for each of the disputed periods which resulted in an overall reduction of £286 in the amount assessed. The Appellant, however, did not accept the reduction, still insisting that VAT declared in its returns was correct. In those circumstances Mrs Thomas did not alter the revised assessment issued on 12 January 2005.
11.	We consider the Appellant’s processes and systems for calculating the correct amount of VAT due for the periods 07/01 to 09/03 were flawed and unreliable. 
(1)	The original till did not have the capacity to record the complete range of sale categories which when coupled with the inadequate training given to staff  increased the likelihood that standard rated grocery items would be under-recorded. Our finding is supported by the analysis of standard rated confectionary and stationery sales and zero-rated grocery sales in paragraph 10(7) above. Essentially when the new till was introduced the value of standard rated confectionary and stationery sales increased not only in absolute terms but in relative terms to zero-rated grocery sales and as a proportion of total sales. 
(2)	Mr Kemp’s method for calculating the value of standard rated supplies was inherently unreliable. Mr Kemp did not rely on the values recorded on the till rolls but instead he computed the value of standard rated supplies by deducting the value of zero-rated supplies from the takings banked plus cash from the till used to pay bills. The integrity of Mr Kemp’s method depended upon whether the sums recorded for bankings plus cash accurately reflected the value of the goods sold. These recorded sums, however, did not allow for cashier errors, theft, own use of goods or a failure to write out a receipt for cash used from the till to pay bills. This meant that the sums underestimated the value of goods sold, which under Mr Kemp’s method depressed the value of the standard rated supplies.
12.	 We find that the value of standard rated supplies in the Appellant’s VAT returns for 07/01 to 09/03 was understated, which arose from the inherent weaknesses in the Appellant’s processes and systems. 
13.	  We consider that the figures for periods 12/03 and April 2004 to December 2004 provided a more accurate reflection of the Appellant’s business. The figures have been derived from the Z readings on till rolls. In 12/03 the value for standard rated supplies was £40,529 (52.1 per cent of total sales). The Respondents did not dispute the 51 per cent figure quoted in the Appellant’s accountants’ letter dated 21 March 2005 for standard rated sales for April to December 2004. These figures suggest that the value of the Appellant’s standard rated supplies during the periods under Appeal constituted 51 to 52 per cent of the total sales.
Reasons for Our Decision
14.	Section 73(1) of the Value Added Tax Act 1994 gives  the  Respondents authority to issue assessments for VAT when specific circumstances apply:
“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”.
15.	 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.
16.	In this Appeal Mrs Wilcox had reasonable grounds for suspecting that the Appellant’s VAT returns were inaccurate because the value of the standard rated supplies appeared low when compared with the Appellant’s annual accounts. Mrs Wilcox’s examination of the respective values of the Appellant’s standard rated and zero-rated purchases confirmed her suspicions. Mrs Wilcox gave the Appellant an opportunity to respond to her findings which it did not take up. There followed an exchange of correspondence between the Appellant’s accountants and Mrs Thomas conducted over a period of eight months. Mrs Thomas considered the representations made and in the end drew up a provisional amended assessment based upon the 51 per cent figure for standard rated sales as suggested by the Appellant’s accountants. The Appellant, however, did not accept the provisional assessment. 
17.	Mr Kemp considered that the Respondents were attempting to impose a VAT assessment upon the Appellant based upon some elaborate mark up/apportionment scheme.  Mrs Wilcox and Mrs Thomas were not seeking to impose an apportionment scheme upon the Appellant. They were simply using the comparison between the respective percentages of standard rated sales and purchases to demonstrate their finding that the value of standard rated sales had been understated in the Appellant’s VAT returns. 
18.	Mrs Wilcox and Mrs Thomas carried out their duties under section 73 of the 1994 Act of considering the information placed before them and coming to a decision which was reasonable and not arbitrary as to the amount of tax due.
19.	The central issue in this Appeal was whether the Appellant established on the balance of probabilities that the amount of VAT declared in its returns for the periods 07/01 to 12/03 was correct. We found that the processes and systems for calculating the Appellant’s VAT liability adopted by Mr Kemp were flawed and unreliable with the result that the value of the Appellant’s standard rated supplies was understated for the periods in question.  The flawed processes were the consequence of Mr Kemp’s incomplete understanding of the accounting and legal requirements for VAT. Mr Kemp did not deliberately set out to understate the Appellant’s VAT liability.
20.	 In view of our findings of fact, the Appellant has failed to satisfy us on the balance of probabilities that the VAT declared in its returns for the periods 07/01 to 12/03 were correct.  
21.	We found that the figures for periods 12/03 and April 2004 to December 2004 provided a more accurate reflection of the Appellant’s business, which suggested that the value of the Appellant’s standard rated supplies during the periods under Appeal constituted 51 to 52 per cent of the total sales. We have decided to adopt the figure of 51 per cent for the value of the Appellant’s standard rated supplies for each of the periods under dispute, which was the same conclusion reached by Mrs Thomas in her provisional assessment dated 22 March 2005. We determine that the assessment for VAT for periods 07/01 to 12/03 is £9,999 plus interest.
22.	We, therefore, dismiss the Appeal. We make no order for costs.

                                 MICHAEL TILDESLEY OBE
CHAIRMAN
RELEASE DATE: 12 December 2006

LON/