20047

VAT – Assessments – whether amounts of tax assessed under s.73 VATA 1994 (best of judgment) excessive – whether misdeclaration penalties assessed under s.63VATA 1994  ought to be reduced – Held (subject to two minor matters) no – appeal dismissed accordingly 

LONDON TRIBUNAL CENTRE

	VAN WYKE CONSULTING	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S 
	REVENUE AND CUSTOMS	Respondents

			Tribunal:	JOHN WALTERS QC (Chairman)
					MRS. SHAHWAR SADEQUE

Sitting in public in London on 12 September 2006

D. James, of Derek James & Co., Chartered Accountants, for the Appellant

J. Holl, Advocate, Solicitor’s Office of HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2007

DECISION

1.	Caroline Van Wyke (the Appellant) appeals against assessments to value added tax (VAT) and misdeclaration penalties as follows: an assessment (notice of assessment dated 15 November 2002) in the sum of £19,902 for the periods 03/01, 06/01, 12/01 and 06/02 and an assessment (notice of assessment dated 20 December 2002) in the sum of £13,328 for the periods 12/99, 03/00, 06/00, 09/00, 12/00 and 06/02; a misdeclaration penalty (notification letter dated 21 October 2003) of £2,756 and a misdeclaration penalty (notification letter dated 3 November 2003) of £2,908.  (The repetition of the period 06/02 in the assessments is explained by the fact that the first assessment covers the month of April 2002, in relation to which copy invoices were seen by the Commissioners, and the second assessment covers the final two months of the period, May and June, 2002, by an extrapolation exercise which is referred to below.)
2.	The Tribunal understands that the Appellant’s business is a consultancy in the preparation of annual reports and similar documents and that she has a restricted clientele.
3.	The output tax assessed for the periods 03/01, 06/01 and 06/02 (total: £12,552) is accepted by the Appellant to have been correctly assessed and has been paid.  The dispute in relation to the remaining period covered by the first assessment (namely 12/01, which was a six month period) concerns the correct amount of input tax creditable.  Input tax of £7,350.42 was claimed in the Appellant’s return for that period. The Commissioners assessed the whole of that amount as not being creditable, because they had seen no vouching documentation for it (having asked to see such documentation), but in making the assessment they offset an amount of £270 representing output tax for that period which they had ascertained as having been overpaid by an examination of the Appellant’s sales invoices for that period.  In the course of the hearing Mr. Holl, for the Commissioners, indicated that a credit of £350.42 would be allowed in respect of input tax for the period 12/01, being an amount arrived at by extrapolating the amounts of input tax claimed in periods 03/01 and 06/01. 
4.	The output tax assessed for the periods 12/99, 03/00, 06/00, 09/00, 12/00 and 06/02 is disputed on the basis that the Appellant’s accountant, Mr. James, examined the Appellant’s records for the period from 1 October 1999 to 31 August 2002, compared the moneys banked with the VAT-inclusive sales returned for VAT purposes, and prepared a schedule which arrived at a shortfall of output VAT of £12,791.54 owing to the Commissioners, which, Mr. James says, is represented by the VAT assessed by the first assessment (see: the previous paragraph).  He says the underdeclaration probably occurred in relation to the period 12/01.
5.	Mr. James told the Tribunal that the Appellant had been ill between January 2001 and February 2003 and that she had been unable to conduct any business activities from May 2002 until July 2004 (this appears from the grounds of appeal submitted by the Appellant).  He also said that during this period of illness she moved house and in the course of the move (on the night of 20-21 November 2001) her accounting records were lost, being in a van which was stolen.  He said that among the lost records were the documents vouching the input tax credit claimed for the period 12/01. He said that the total input tax credit to which the Appellant ought to be entitled was £12,155.67, but that, in view of the absence of supporting documentation, he submitted that the Commissioners ought to allow half of that amount, i.e. £6,077.83.  As against that, the Commissioners offered to allow a credit of £350.42 – as noted above in paragraph 3.
6.	Mr. Holl told the Tribunal that the assessments had been made to the best of the Commissioners’ judgment.  The first assessment was made by reference to calculations drawn from copy invoices (covering the period from January 2001 to April 2002) which had been made available by the Appellant, to Mrs. Lever, the Officer concerned.  They showed an underdeclaration of output tax for the periods covered by the invoices, viz: 03/01, 06/01, 12/01 and 06/02.  The second assessment had been made by extrapolating the underdeclarations identified to the earlier periods 12/99 to 12/00 inclusive, (but also including period 06/02) on the basis that as there had been underdeclarations in the later periods, the Commissioners reasonably thought there had been like underdeclarations in the earlier periods.
7.	The Appellant did not appear to give oral evidence on which she could be cross-examined.
8.	The Tribunal however heard evidence from Mrs. Maria June Lever, the Officer of the Commissioners.  She said, and the Tribunal accepts, that there had been a long history of appointments arranged and missed by the Appellant, and a failure to keep promises to supply basic documentation for inspection by the Commissioners.  The copy sales invoices which had been supplied to Mrs. Leaver had been so supplied by a man who described himself as the Appellant’s friend, who had handed them to Mrs. Lever at an appointment at which she had expected to meet the Appellant.  She had received no copies of bank statements and no income and expenditure accounts.  
9.	Mrs. Lever calculated that her analysis of the copy invoices had shown an underdeclaration of VAT accumulated over 16 months.  On that basis she worked out a monthly average underdeclaration of one-sixteenth and applied it to each of the 17 months in the periods which the second assessment covered.
10.	The assessment was referred by the Appellant to Mr. James.  He accepted, on the Appellant’s behalf, that £12,552 VAT had been underdeclared and ought to be assessed.  He resisted the disallowance of input tax credit sought of £7,350 and also the second assessment (calculated by extrapolation).  This led to an internal departmental review of the matter by Officer John Folkes, District Manager at the Southampton VAT Office.  He concluded that the sales invoices seen by Mrs. Lever demonstrated beyond any reasonable doubt that VAT returns submitted by the Appellant were understating output tax due on a regular basis and that the first assessment showed what was likely to be a minimum of the amount underdeclared in the periods covered.  He commented that the input tax claim of £7,350 was more than 27 times the amount that would have been expected based on the input tax claimed over the preceding 18 months and that Mrs. Lever would have been failing in her duty had she not disallowed that input tax in the absence of evidence to support it.
11.	Mr. James, in reply, referred to the impossible position in which the Appellant had been placed as a result of the theft of her records and the matter was reviewed again within the department, this time by Officer T.J. Duignan.  He confirmed the assessments.
12.	Mr. James subsequently submitted the schedule referred to at paragraph 4 above.  Mrs. Lever considered it but it did not cause her to revise the assessments, because it was an analysis on a cash basis, whereas the Appellant had informed Mrs. Lever, by e-mail dated 19 August 2002 (a copy of which was in the Tribunal’s bundle), that she accounted for VAT on an invoice basis. Furthermore, no details were provided of the expenditure in relation to which input tax was claimed beyond summaries submitted to the Inland Revenue supporting the Appellant’s income tax returns.
13.	Mrs. Lever told the Tribunal (and we accept) that the Appellant had never mentioned to her that she had been ill. 
14.	The penalty assessments were raised under section 63 VAT Act 1994 (misdeclaration).  They are at the (unmitigated) statutory rate of 15 per cent. In detail they are as follows:
Period		Tax Assessed		Penalty
06/01		£5212			£781
12/01		£7080			£1062
06/02		£6090			£913
				Total	£2756
12/99		£2352			£352
03/00		£2352			£352
06/00		£2352			£352
09/00		£2352			£352
12/00		£2352			£352
06/01 (sic)	£7658			£1148
				Total	£2908
15.	The figures for “tax assessed” taken from the notices of assessment of misdeclaration penalty (above) tally with the assessments on appeal except in the following respect.  The assessment for the VAT period 06/01 is £5,212, and there is no second assessment for that period in the amount of £7,658 (or any amount).
16.	Mr. Holl, in his closing submissions, reminded the Tribunal that the burden of proof to set aside or reduce the assessments was on the Appellant, and she had not given oral evidence.  It had been conceded by Mr. James that the Appellant’s returns had been incorrect or incomplete.  Therefore section 73 VAT Act 1994 (the Commissioners’ power to assess to the best of their judgment) was in point.  He cited the Tribunal’s decision in Curry Inn Restaurant v Commissioners of Customs and Excise (1998) and the Court of Appeal’s judgment in Customs and Excise Commissioners v Pegasus Birds Ltd. [2004] STC 1509, especially at [38], where Carnwath LJ gave guidance to the tribunal.  He emphasised that the only primary business documentation which the Commissioners had seen, despite repeated requests, had been the bundle of copy invoices analysed by Mrs. Lever, which had been the basis for the assessments.  Mr. James’s submission was that his schedule comparing the VAT returns submitted and the Appellant’s cash deposits at bank showed that the totality of the errors made in returns submitted by the Appellant had been picked up by Mrs. Lever in her examination of the invoices which she had seen.  As for the input tax claim, it had been impossible to vouch, simply because the documentation had been lost.
The Tribunal’s Decision 
17.	Carnwath LJ’s guidance in Pegasus Birds at [38] was as follows:
“…I would make four points by way of guidance to the tribunal when faced with ‘best of judgment’ arguments in future cases:
(1)	The tribunal should remember that its primary task is to find the correct amount of tax, so far as possible on the material properly available to it, the burden resting on the taxpayer.  In all but very exceptional cases, that should be the focus of the hearing, and the tribunal should not allow it to be diverted into an attack on the Commissioners’ exercise of judgment at the time of the assessment.
(2)	Where the taxpayer seeks to challenge the assessment as a whole on ‘best of judgment’ grounds, it is essential that the grounds are clearly and fully stated before the hearing begins.
(3)	In particular the tribunal should insist at the outset that any allegation of dishonesty or other wrongdoing against those acting for the Commissioners should be stated unequivocally; that the allegation and the basis for it should be fully particularised; and that it is responded to in writing by the Commissioners.  The tribunal should not in any circumstances allow cross-examination of the Customs officers concerned, until that is done.
(4)	There may be a few cases where a ‘best of judgment’ challenge can be dealt with shortly as a preliminary issue.  However, unless it is clear that time will be saved thereby, the better course is likely to be to allow the hearing to proceed on the issue of amount, and leave any submissions on failure of best of their judgment and its consequences, to be dealt with at the end of the hearing.”
18.	The Tribunal did not understand Mr. James to have been making the point that any of the assessments failed as a whole on ‘best of judgment’ grounds.  The first assessment was accepted as correct, subject to the point about deductible input tax in period 12/01.  The second assessment was attacked, not on the grounds of a failure to exercise the best of judgment, but because it was said that Mr. James’s schedule, referred to in paragraph 4 above, showed a more accurate picture of the reliability of the Appellant’s VAT returns.  This was essentially an attack on the basis of the quantum of the assessment, rather than on ‘best of judgment’ grounds.  It is unnecessary to add that if the attack had been on ‘best of judgment’ grounds it would have failed for lack of unequivocal statement and particularisation. 
19.	The crux of the matter, therefore, is: has the Appellant discharged the burden of proof on it to show that the assessments are excessive?  Except in relation to two relatively minor matters, the Tribunal can only answer “No”.  Mr. James’s schedule suffered from the defect noticed by Mrs. Lever that it assumed that the Appellant was accounting for VAT on a cash basis, whereas she had told Mrs. Lever in an e-mail, that she accounted on an invoice basis.  This reduced whatever helpfulness the schedule might otherwise have had.  The main point in relation to the schedule, of course, is that the Commissioners were never shown any of the Appellant’s bank statements or otherwise enabled to check or audit the schedule.  Likewise, in relation to the input tax deduction claimed in period 12/01, no evidence has been supplied to support it.  The Tribunal notes that it is a matter of Community law as well as domestic law that as a condition of exercising a right to deduct input tax a taxable person must hold documentary evidence supporting that right.  Therefore, the Appellant has failed to discharge the evidential burden which is upon her in this appeal.
20.	The Tribunal considers that this is not a suitable case to interfere with the basis of assessment of the misdeclaration penalties.  No reasonable excuse has been shown and (subject to what follows in the next paragraph) the Tribunal finds no grounds to mitigate the penalties.
21.	The two relatively minor matters referred to above are as follows.  First, following the concession made by Mr. Holl at the hearing, the assessment in respect of the period 12/01 falls to be reduced by £351 to recognise the input tax deduction which the Commissioners will allow.  This has a consequential effect on the misdeclaration penalty for that period which must be reduced by 15 per cent. of that amount, i.e. by £53.  Secondly, the Tribunal has identified an error in the assessment of the misdeclaration penalties.  The total tax assessed for the period 06/01 is £5,212.  Therefore the second amount of penalty (£1,148) assessed in respect of that period (see: paragraph 14 above) must be reduced to nil.
22.	Subject to these points, the appeals are dismissed.

JOHN WALTERS QC

CHAIRMAN
RELEASE DATE:  8  March  2007

LON/2004/1612