20288

VAT – retail scheme – entitlement to adjust by mixing schemes? – appeal dismissed.

MANCHESTER TRIBUNAL CENTRE

EZZAT SALEH	Appellant

-	and –

COMMISSIONERS FOR HER MAJESTY’S
REVENUE AND CUSTOMS 	Respondents

Tribunal: Richard Barlow	 (Chairman)
Peter Whitehead

Sitting in public in Manchester on 1 June 2007

Mr Hyman Pinczewski FBAA FCCA for the Appellant 

Mr Richard Chapman of counsel for the Respondents

© CROWN COPYRIGHT 2007

DECISION

1.	The appellant trades as a general groceries retailer under the name Value Choice and this appeal is an appeal against assessments totalling £3,886 for the calendar years 2003, 2004 and 2005.  However, as Mr Pinczewski explained, the amount actually in dispute is £1,572 which is made up of part of a sum of £1,714 alleged, in the assessment, to have been under-declared as output tax in 2004 and a sum of £469 alleged, in the assessment, to have been over-claimed as input tax in the same year.  No witnesses were called but Mr Pinczewski produced documents and explained the case to us as far as the first element of the dispute was concerned.  The basic facts about that are not in dispute and were set out in the documents.

2.	The appellant makes annual VAT returns coinciding with the calendar year and has operated under retail scheme “Apportionment Scheme 1” at all material times.  Apportionment Scheme 1 is designed as a simple scheme for retailers whose turnover does not exceed one million pounds per annum.  Use of the scheme is entirely voluntary and a retailer does not need permission to use it.  The scheme requires the trader to calculate the proportions of his purchases that will be sold as standard rated, lower rated and zero rated goods and then to separate out from his total takings sums representing those same proportions and to calculate the VAT included in that sum, applying the relevant VAT fraction.  For example, if 50% by value of purchases are of goods for sale as standard rated supplies and the turnover is £100,000 the calculation of the part of the amount due as VAT on those sales is £100,000 x 50% x 7/47 = £7446.80).

3.	Mr Pinczewski explained that that retail scheme operated to Mr Saleh’s disadvantage because he sells a lot of cigarettes which are standard rated but which have a low mark up so that the higher mark up applicable to other standard rated goods affects the calculation because it effectively assumes that the same mark up will have applied to all the sales included in the turnover.  We do not doubt the logic of that assertion in principle though Mr Pinczewski had not carried out an exercise taking into account the different mark ups on all lines sold to demonstrate exactly or even approximately what the effect was.  

4.	Mr Pinczewski had calculated the expected selling prices of cigarettes and had made a separate calculation for cigarettes only, having extracted the expected selling prices from the turnover, but applying Apportionment Scheme 1 in the normal way to all other goods.  He then combined the two and compared the total with the tax declared plus the output tax assessment and sought to adjust the assessment accordingly.  Calculation of the expected selling price is a characteristic of Apportionment Scheme 2.            

5.	The retail schemes are available for traders to use if they fall within the applicable conditions and if they choose to avail themselves of the scheme.  In this case Mr Saleh was entitled to use Apportionment Scheme 1 or 2, at the relevant times, because his business had a turnover below the maximum limits allowed and his was a retail business. 

6.	The schemes are provided for under regulation 67 of the VAT Regulations 1995 which allows the Commissioners to publish a Notice describing a method.  In that way the Notice has the force of law and it creates the form in which the scheme is permitted (special schemes can be agreed but there was no attempt to do that in this case).  Notice 727/4/02 which deals with the schemes is quite specific about two relevant aspects of them.  First, the Notice makes it clear that no “mixing” of the schemes is allowed and second that no retrospective use of the schemes is allowed.  Mr Pinczewski’s calculations would amount to mixing the schemes.  It is true that, as a tailor made scheme can be agreed with the Commissioners, it might be possible to agree with them a special scheme involving elements of two standard schemes but that is not what happened here.

7.	Reference was made during argument to a case called L&P Fryer –v- Customs and Excise (Decision 14265) but as that case followed the earlier reported case of L&J Lewis –v- Commissioners of Customs and Excise [1996] V&DR 541 we will refer to that.  Mr Pinczewski said at the hearing that he would be happy for the tribunal to consider the earlier cases even though he had not himself seen them and Mr Chapman did not demur.     

8.	In the Lewis case the tribunal was concerned with an application for a change of scheme within a year of starting to operate it and under the Regulations the Commissioners can permit such a change but they only do so if the circumstances are exceptional and even then retrospection as such is not allowed.  The tribunal, following many earlier cases, held that in principle the amount of tax due as calculated by the correct operation of the scheme becomes the amount of tax due even if it differs from the amount that would have been due had the trader kept a full record and accounted for tax exactly according to the actual sale price of each item sold.

9.	That principle applies here.  If a trader chooses to use a scheme the amount due under the scheme is the amount of VAT payable even if it differs from the amount that might otherwise have been due.  It might be that a very large divergence between the amount calculated as due under the scheme and the amount that would be due if the taxpayer had accounted for tax on the basis of each supply made would be subject to reconsideration where an assessment has been made.  In such a case it might be argued that the tribunal’s role in determining the correct amount of tax due when an assessment is made would allow it to correct an assessment.  However, that is not this case because the actual difference between the scheme and the normal point of supply calculations (had they been made) is not known and we have no reason to think it would be large.   The schemes are intended to be an approximation and recognise that a trader may be prepared to take the risk that he pays slightly more than would otherwise have been the case because the saving in time and expense achieved by the simplification of book keeping procedures outweighs that disadvantage.  Indeed the Notice warns of that risk.

10.	Therefore Mr Saleh is not entitled to mix the schemes because the correct amount due is the amount as calculated under the scheme he was using which was Apportionment Scheme 1 and the fact that a different mix of schemes might have given a different result is not relevant.  We would add that we are not satisfied on the evidence that we heard that the result of a tailor made scheme involving the mixture of both apportionment schemes would have produced a different result (or a significantly different result) as Mr Pinczewski’s calculations were not exhaustive.  On those grounds we hold that the part of the assessment that has been challenged on the basis that the scheme should be modified is upheld.

11.	The other element of the assessments that remained in dispute is a claim for input tax in the sum of £469.25.  HMRC had disallowed that because it related to two payments for web design services in respect of a business or enterprise apparently called ArtCart.  The appellant was unable to produce invoices for these supplies when asked to do so by HMRC and there was no evidence that he had accounted for any output tax in respect of any such business.  A claim for input tax is conditional upon the taxpayer holding a tax invoice from the supplier (regulation 29 of the VAT Regulations 1995) and it must be attributable to supplies he has made or intends to make (section 26 VAT Act 1994).  The burden of proof rests upon an appellant to demonstrate the facts to support a challenge to an assessment and as the appellant has produced no evidence relating to either of those points the assessment must be upheld in that respect. 

12.	As we have upheld the only parts of the assessments that are in dispute the appeal is dismissed.

			CHAIRMAN: RICHARD BARLOW

RELEASED: 7 August 2007

MAN/06/0796.