20505

VAT – Best of judgment assessment on average mark up – accurate figures available – not best of judgment – appeal allowed

LONDON TRIBUNAL CENTRE

	TREVOR STAFFORD T/A ALL BIKES	           Appellant

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

			Tribunal:	ADRIAN SHIPWRIGHT (Chairman)
					RUTH WATTS DAVIES FCIPD, MHCIMA	

Sitting in public in London on 13 September 2007

The Appellant in person

Ms G Orimoloye, Advocate of HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2007

DECISION
Introduction

1.	This is an appeal by the Appellant (“Mr Stafford”) against an assessment for VAT dated 6 March 2006.  This was based on a calculation made by the Respondents as to the mark-up on standard rated goods as compared to the mark-up on zero rated goods.
The Issue

2.	The issue in this appeal is whether the assessment was properly made the onus being on the taxpayer to show that it was not.

3.	HMRC specifically confirmed that they were not alleging any fraud or dishonesty or that entries had been deliberately mis-keyed in this appeal. They accepted that the accounts were full and well presented and tallied with the ‘Z’ rolls. We have proceeded on that basis.
The Law

4.	Section 73 Value Added Tax Act 1994 (“VATA”) provides that the Commissioners may assess the amount of VAT due from a person to the best of their judgment where a person has failed to make any returns required under the VATA or to keep any documents and afford the facilities necessary to verify such returns or where returns are incomplete or incorrect.

5.	Section 63 VATA provides that where a return understates a person's liability to VAT the person concerned shall be liable to a penalty equal to 15% of the VAT that would have been lost if the inaccuracy had not been discovered. This is not in issue here.
Authorities

6.	We were not provided with copies of or referred to any cases.
The Evidence 

7.	Each party provided us with a bundle of documents. No objection was taken to any of these documents and they were all admitted in evidence.

8.	We heard oral evidence from
	
                    (1)  Mr Stafford, the Appellant;
                    (2)	Ms Emma Curtis, an HMRC officer.
9.	We did not hear evidence from the HMRC officers who made the assessment or carried out the review. It would have been useful to have heard their evidence. It is a shame they were not called as they might have been able to explain why the particular approach was chosen and why it gave a better result than the records they used to reach their result which they accepted accurately recorded what was on the till receipts and when there was no allegation of dishonesty but a very high input error would have been required (in excess of one in three). 
Findings of Fact 

10.	From the evidence we make the following findings of fact.

                  (1)  The Appellant carries on business under the name “All Bikes” from an          	industrial estate outside Folkestone.  
                  (2)	The business is the sale by retail of new and used motorcycle parts, 	motorcycles and accessories and the servicing and repair of 	motorcycles.  Most of these supplies are standard rated although there 	are zero rated supplies on such matters as childrens’ clothing, 	manuals and motorcycle helmets.  
                  (3)	An assurance visit was undertaken in July 2005.  The Appellant’s till 	was examined and it was discovered that there existed individually 	coded till buttons for particular items held out for resale.  There was a 	separate button on the till to identify zero rated sales.
                  (4)	Using the Appellant’s records for the previous two years the 	Respondents calculated a mark-up for standard rated goods of 8.7% 	and a mark-up for zero-rated goods of 289%.
                  (5)	Using these figures assessments were then made for what was 	claimed to be undeclared standard rated output tax.
                  (6)	We heard oral evidence from the Appellant.  He produced his 	documents recording his sale.  It was very clear, well presented and 	comprehensive.  He recorded these matters each night from the till 	records.  He accepted that he could be described as almost obsessive 	about this. We found him to be a truthful and reliable witness and we 	accept all of his evidence as accurate.
                  (7)	The Appellant accepted that there was a separate till button for 	recording zero rated supplies but was insistent that he did not 	misrecord sales other than in rare circumstances where he may have 	unintentionally made a mistake.  
                  (8)	We accept the Appellants evidence completely and unreservedly that 	he recorded his sales transactions as accurately as possible and 	maintained full records almost to a degree of obsession.
                  (9)	We find as a matter of primary fact that the Appellant did not 	misrecord sales other than in rare circumstances where he may have 	unintentionally made a mistake. It was certainly nothing like the one 	in three figures necessary for the Respondent’s figures to be correct. 
                  (10)	We also find that the different lines had different mark ups so that in 	the circumstances of this case average mark ups and a comparison of 	standard and zero rated supplies does not give an accurate result 	when the real information is thee in almost obsessive detail. 
Submissions of the Parties  
The Appellant’s submissions in outline

11.	The Appellant contended that he had run his affairs properly and truthfully and his records were correct. He had done nothing dishonest. On the contrary he had done his utmost to record transactions properly and correctly. The mark ups differed on different lines of goods. There was no average mark up. In effect, he argued we had the real raw data that he had recorded properly and we should use that rather than some arcane profit comparison to work out the amount of a turnover tax.

12.	The Respondent contended that the mark up computations produced an average mark up for standard rated goods of 8.7% but of 289% on zero rated goods which on an adjusted basis could be 364%.The Respondent had made a proper best of judgment assessment which should stand. The difference between the mark ups was not for the Respondent but was due to such things as mis-entering of sales.  Cases such as Van Boeckel supported this.
Discussion
Our Task and How to Approach It

13.	Our task is to decide whether or not the assessment was properly made to "the best of their judgement" by HMRC.  The onus is on the Appellant show that it was not so made if the Appellant is to succeed.

14.	In approaching this task we remind ourselves of what Lawrence Collins J said in Rahman v Customs and Excise (Number 2) and the "Guidance to the Tribunal" Carnwath LJ gave in Customs and Excise v Pegasus Birds.

15.	Lawrence Collins J said (at paragraphs 18-20):

 “[18] In McNicholas Construction Co Ltd v Customs and Excise Comrs [2000] STC 553 at 581 Dyson J said, after referring to the decision of Carnwath J in Rahman (No 1), that the words 'to the best of their judgment' permitted the commissioners a margin of discretion in making an assessment, and a taxpayer could only challenge the assessment if he could show that the commissioners acted outside the margin of their discretion by acting in a way that no reasonable body of commissioners could do. On a best judgment challenge, the taxpayer had to show that the assessment was wrong in a material respect and that, if so, the mistake was such that the only fair inference was that the commissioners did not apply best judgment, as explained in Van Boeckel. The primary focus of the attention of the tribunal should be on the objective evidence adduced by the taxpayer in seeking to discharge the burden of showing that the amount of VAT assessed was not due from him. That was because it would be absurd for the tribunal to conclude that the assessment was correct, but that the commissioners had made a dishonest or capricious assessment. Parliament cannot have intended that a tribunal should be required to set aside assessments which were shown to be correct, or which the taxpayer did not show were incorrect. See also Elias Gale Racing v Customs and Excise Comrs [1999] STC 66 at 73, where Carnwath J rejected the argument that an assessment could be invalidated by a failure to exercise best judgment when the failure was to the benefit of the taxpayer.

[19] In my judgment, the better view is that, first, an assessment which turns out on the evidence to be substantially correct cannot normally be attacked as being contrary to best judgment, and, the fact that it turns out to be substantially incorrect does not mean that it was contrary to best judgment. It follows from Van Boeckel, Rahman (No 1) and McNicholas that to show, on an appeal to the tribunal, that an assessment has not been made to best judgment the taxpayer must show that the assessment is wrong in a material respect, and that the mistake was such that the only inference is that the assessment was arbitrary (in Woolf J's formulation), or (in Carnwath J's formulation) dishonest, vindictive, or capricious, or based on a spurious estimate or guess, or is wholly unreasonable. If the assessment is wrong in a material respect but the taxpayer fails to show that it was not made to best judgment the tribunal will deal with it on the quantum aspect of the appeal.

 [20] The tribunal's approach to the best judgment issue was squarely based on the approach of Carnwath J in Rahman (No 1) and of Dyson J in McNicholas. I do not accept the submission that the duty of the tribunal was to put itself objectively in the position of a reasonably competent officer in order to test whether what had been done in preparing and issuing the assessment, and to consider whether the officer had fairly considered all the material, and come to a reasonable conclusion. In my judgment, the tribunal was right to follow the approach that a much stronger finding was required, for example, that the assessment had been reached dishonestly or vindictively or capriciously, or was wholly unreasonable.”

16.     Carnwath LJ's guidance is as follows:

“Guidance to the tribunal
[38]  I would make four points by way of guidance to the tribunal when faced with 'best of their judgment' arguments in future cases:

(i) 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.

(ii) Where the taxpayer seeks to challenge the assessment as a whole on 'best of their judgment' grounds, it is essential that the grounds are clearly and fully stated before the hearing begins.

(iii) 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.

(iv) There may be a few cases where a 'best of their 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.”

17.	We also note Chadwick LJ's approach in Pegasus:

“[82] In relation to cases where the explanation for the discrepancy was to be found in the different assumptions made by the Commissioners and the tribunal, I had said this (at para 32):

'As Woolf J pointed out in Van Boeckel, that does not lead to the conclusion that the assumptions made by the commissioners were unreasonable; nor that they were outside the margin of discretion inherent in the exercise of judgment in these cases.'

Taken out of context, that sentence might appear to suggest that I was accepting that there was an objective standard of reasonableness against which the assumptions made by the Commissioners were to be measured; so that an assessment made on the basis of assumptions which did not meet that standard was not properly made under the power conferred by s 73(1) of the 1994 Act. But I am satisfied that that would not be a proper reading of that sentence in the context in which it is set.

[83] The sentence which I have just set out is, perhaps, no more than a statement of the obvious. The fact that the tribunal, in making their own assessment of the VAT properly due, has thought it right to reject the assumptions as to food/drink ratios, wastage or pilferage on which the Commissioners' s 73(1) assessment was based—and to make different assumptions as to those matters—cannot, of itself, lead to the conclusion that the Commissioners' assumptions were unreasonable; a fortiori, that those assumptions were 'wholly unreasonable' in the sense that they were outside the margin of discretion inherent in the exercise of judgment in these cases—a phrase used by Dyson J in McNicholas Construction Co Ltd v Customs and Excise Comrs [2000] STC 553. All that can be said from the fact that the tribunal has adopted assumptions which differ from those adopted by the Commissioners is that the tribunal have preferred their own assumptions.

[84] But, of course, the tribunal may choose to make a finding that the assumptions made by the Commissioners were wholly unreasonable; as they did in the present case. The question, then, is whether it follows from that finding that the Commissioners did not make the assessment 'to the best of their judgment'. That is, in substance, the same question as the question which I addressed in Rahman (No 2) in the context in which it arose—an admitted miscalculation in computing the amount of VAT due arising from a double counting of purchase invoices and delivery notes. As I have said, it was in that context that I observed that the relevant question was whether the mistake was consistent with an honest and genuine attempt to make a reasoned assessment of the VAT payable; or was of such a nature that it compelled the conclusion that no officer seeking to exercise best judgment could have made it. The relevant question is much the same where the tribunal has found that the assumptions made by the Commissioners were wholly unreasonable; in that context the question is whether, in the particular case, the making of wholly unreasonable assumptions by the officer compels the conclusion that he was not doing his honest best. That, I think, is what Dyson J had in mind when he said, in McNicholas ([2000] STC 553 at 581, para 76), that:

'In order to succeed, the taxpayer must show that the assessment was wrong in a material respect, and that if so, the mistake is such that the only fair inference is the commissioners did not apply best judgment …'

[85] In reaching the conclusion, in Rahman (No 2) and on the present appeal, that it is enough that the officer through whom the Commissioners act in making the assessment 'does his honest best', I have sought to construe s 73(1) of the 1994 Act in the sense which sits most easily within the statutory framework.” 

He continued:

 “[88] It seems to me necessary to ask whether, given the statutory framework, there is any good reason why Parliament should have intended there to be engrafted upon a power to assess the amount of VAT due 'to the best of their judgment' some objective standard against which the assessment must be measured. Why should it not be enough, in this context, that the Commissioners, through their officer, make an honest and genuine attempt to make a reasoned assessment of the VAT payable? If, doing his honest best, the officer makes an assessment which turns out to be wrong, the tribunal can substitute their own assessment on appeal. Why should it have been thought necessary to introduce the additional requirement that the assessment be measured against an objective standard; so that, if the officer (despite doing his honest best) fails to attain that standard, the tribunal must hold that there has been no proper exercise of the power to assess, the assessment must be treated as if it had not been made, and there is no basis (because there is no existing assessment) upon which the tribunal can substitute their own assessment of the correct amount? I have not been persuaded that there are satisfactory answers to those questions.”

18.	With this in mind we turn to considering whether the assessment was properly made to best of judgment. Remembering that our 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 we consider the arguments of the parties.

19.	We have to consider whether the Appellants meticulous records give a better guide to the correct amount of tax as opposed to the amount of the mark-up calculations undertaken by the Respondents.

20.	As we have accepted the Appellant properly recorded his sales and did so as accurately as he could we prefer his records which we consider to be accurate to the mark-up calculations made by the Respondents.

21.	We consider that the Appellant has discharged the burden of showing that his records are accurate and give the best guide to the amount of tax due.  We find this as a matter of fact.

22.	Having found that the Appellant had properly recorded his transactions we allow the appeal with costs.    

ADRIAN SHIPWRIGHT
CHAIRMAN
RELEASE DATE: 13 December 2007

LON 2006/0880