20509

ASSESSMENT – whether amount of tax due assessed to the best judgment of the Commissioners – yes – whether assessment excessive – yes – assessment reduced to nil – VATA 1994 s 73(1)

LONDON TRIBUNAL CENTRE

	IFIELD SPORTS CLUB	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

			Tribunal:	EDWARD SADLER (Chairman)
					MISS SHEILA WONG CHONG FRICS

Sitting in public in London on 30 October 2007

Mr Graham Deeley, FFA, representing the Appellant

Mr Jonathan Holl, advocate, of the office of the General Counsel and Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2007

DECISION
Introduction
1.	This an appeal by Ifield Sports Club of Ifield Green, near Crawley in West Sussex (“the Appellant”) against an assessment to VAT by The Commissioners for Her Majesty’s Revenue and Customs (“the Commissioners”) for the VAT periods together comprising calendar year 2002.  The original assessment was amended, and the amount now assessed, and against which the Appellant appeals, is £4,540 of VAT and £797.14 of interest.  The assessment was made under the “best judgment” provisions of section 73(1) of the Value Added Tax Act 1994 (“VATA”), which provides that where it appears to the Commissioners that any returns required under VATA are incomplete or incorrect, “…they may assess the amount of VAT due from [the taxpayer] to the best of their judgment and notify it to him.”
2.	In the present case the Commissioners noted that the Appellant was making repayment claims, which they considered unusual for a business of the kind undertaken by the Appellant, which is the business of providing sports club services and a bar on a non-profit-making basis.  The Appellant was also late in submitting its VAT returns.  Accordingly they investigated the accounts and records of the Appellant, and conducted extensive correspondence with Mr Graham H Deeley, the honorary treasurer of the Appellant, who appeared before us to represent the Appellant.  Mr Deeley was unable to satisfy the Commissioners, who were concerned by what they saw as an unfunded trading deficit as appearing from the VAT returns made by the Appellant, and so they raised the assessment now under appeal.
3.	Our decision is that the assessment was made to best judgment in this case, but that, having regard to the facts before us at the hearing, the assessment should be reduced to nil (and, of course, no interest is payable).  The assessment was made to best judgment in that it was made by the Commissioners in good faith by reference to the information then available and using a method of calculation appropriate to the circumstances, but had the Commissioners taken into account the information available to us at the hearing by the testimony of Mr Deeley their calculation would, in effect, have resulted in a nil assessment.
The evidence and the facts
4.	At the hearing we had before us the extensive correspondence (and related documents) between the parties before and after the assessment was made; the oral evidence of Mr Deeley (who is a fellow of the Institute of Financial Accountants, and an accountant of more than forty years’ experience) together with the further documents he produced in the course of his evidence; and for the Commissioners the oral evidence of Mr Trevor Probert, the VAT compliance officer responsible for making the assessment.
5.	The Appellant was formed in 1983 from the merger of the local cricket and football clubs in order to provide a pavilion, clubhouse and club and other facilities for the two sports clubs.  The Appellant was registered for VAT with effect from 1 May 1984.  Apart from the obvious sports facilities, the Appellant provides social facilities, most notably a licensed bar, gaming machines and so forth.  The Appellant is constituted as a trust, with a body of trustees, but its business is run by a committee (all of whose members are volunteers).  Mr Deeley is a member of that committee, with the function of honorary treasurer, responsible for the financial affairs of the Appellant and its accounting records.  He has been a member of the Appellant club since its inception and its treasurer for a period of over twenty years until 2005.  He attends the club at least once a week.  On a day-to-day basis the bar and social facilities are run by a paid bar steward engaged by the Appellant, whose activities are supervised and monitored by one of the committee who holds the post of clubhouse steward.
6.	The Appellant maintains simple accounting records, namely a weekly cash report (reconciling the till “Z” reading and opening cash in hand with monies banked and cash expenses); a monthly cash report summary (prepared from the weekly cash reports); a cash book, showing receipts and payments – on the receipts side cash receipts are shown from the monthly cash report together with other receipts such as club subscriptions, donations or loans, and the cash book is reconciled with the bank statements; a purchase day book recording each month’s suppliers’ invoices; and the annual accounts, compiled from the cash book and the purchase day book.  The annual accounts are prepared on a calendar year basis and are audited to the standard of showing a true and fair view of the state of the Appellant’s affairs by a chartered accountant.  For the period relevant to this appeal, Mr Deeley produced to us the cash book, bank statements, and audited accounts for 2003 (which included the comparative figures for 2002).
7.	The balance sheet of the Appellant as at 31 December 2002 shows that the Appellant is funded in part by loans totalling £80,165, of which £37,500 is an interest-free loan from the brewers Hall & Woodhouse Limited (the repayment terms of which, related to beer sales, need not concern us), and the balance of £42,665 comprises interest-free loans expressed to be secured on the club’s assets once the necessary legal work has been completed.  Of this balance, £24,000 comprises long-term loans from members (which, we were told, have since been waived), and the remaining £18,650 (approx) comprises loans from Mr Deeley and an associated company, as described below.  
8.	The VAT returns made by the Appellant for the year 2002 (it made monthly returns) showed outputs (i.e. sales and other taxable supplies, exclusive of VAT) totalling £52,638 and inputs (i.e. purchases on which the Appellant pays VAT, exclusive of VAT) totalling £83,811.  Thus in trading terms the VAT returns showed the Appellant running at a loss – excluding VAT, the value of purchases exceeded the value of sales by £31,173.  The Commissioners considered this to be an anomalous position for someone carrying on a business of the kind carried on by the Appellant, particularly in the circumstances where they could not see how the resulting deficit had been funded, and, as we mention below, they formulated their assessment by reference to these figures.
9.	For VAT purposes the business of the Appellant is that of providing sports club services including related social and hospitality services.  The taxable supplies largely comprise sales of drink and snacks from the licensed bar and also sales from gaming machines.  The members of the club are those who play or are interested in football and cricket, and members pay annual subscriptions, which for 2002 totalled £3,600.
10.	The Appellant is run on a “not for profit” basis, so that its aim is to cover its expenses from its sales, but no more.  It prices its drinks so as to be competitive with local public houses and with a view to attracting members to use the bar facilities on days other than those of sporting fixtures.  Sales are, however, very dependent upon matches played at the club at week-ends and Friday night training sessions.  The committee also holds special social events (over Christmas and the New Year, summer barbeques and the like) to try to boost sales, and the cricket and football clubs individually hold fund-raising events.
11.	Trading conditions for the Appellant were particularly difficult in 2002, according to a statement made for the purposes of the appeal on behalf of the trustees of the Appellant.  Prior to 2002 the football club using the premises had fielded 5 teams, but in 2002 this was reduced to 2 teams because the condition of the pitch was such that teams could not compete in the higher leagues.  Certain changes in the junior football section resulted in fewer parents being members.  Furthermore, for the first two months of 2002 there were no football matches (or training sessions) at the Appellant’s premises, because of the poor condition of the ground.  In November and December 2002 there was flooding of the access to the club premises, which not only resulted in all matches being cancelled from mid-November through until the middle of the following January, but prevented the Appellant from providing Christmas and New Year functions.  These various factors had two adverse consequences for the Appellant’s trading position in that year: first, and most obviously, they resulted in reduced sales; secondly, they resulted in the club carrying too much beer as stock, so that a significant amount of stock passed its sell by date and could not be sold (nor could it be returned to the brewery).  (It should be noted that under the terms of the loan with the brewery there was a financial incentive to carry beer stocks at a certain level.)  
12.	Throughout this period the Appellant was open for business 7 days a week.  Each time the bar opened the stale beer in the pumps had to be pulled off, so that approximately 42 pints per week were lost in this way, which became a high cost, in relative terms, when sales were low.  The Appellant attempted to boost sales by holding the price of draft beer at £1.50 per pint until October 2002 (when it was increased to £1.80), and introducing “Happy Hours” on Friday nights and Sunday lunchtimes during which beer was sold at £1.00 per pint.  The committee recognised the difficulty of the trading conditions and the resulting impact on bar profits in 2002, and took corrective action for the following year in terms of price increases and holding lower amounts of beer in stock.  
13.	Under cross-examination Mr Deeley agreed that in 2002 the committee were not on top of the situation as the trading conditions deteriorated.  They made attempts to improve the position by generating further business, but the business remained solvent only because members supported it by loans.
14.	In particular, Mr Deeley himself made interest-free loans totalling £4,750 to the Appellant during 2002.  Also, Citymist Limited, a company whose shares were held by Mr Deeley and a family member, made interest-free loans totalling £13,900 to the Appellant during 2002.  In the audited accounts of Citymist Limited for the year to 31 January 2002 (the only accounts of the company before us in evidence) its loans to the Appellant (which at 31 January 2002 totalled £4,500, £2,000 having been advanced on 24 January, and a further £2,500 on 28 January) are shown not as debtors, but as “bank balances”, reflecting the fact that the company held cheques from the Appellant for repayment of the loans, but those cheques were not presented for payment by the company (this remains the position, although Citymist Limited was placed in solvent liquidation, and the benefit of the loans transferred to Mr Deeley in the course of the distribution of assets to shareholders in the winding-up of the company).  The cash receipts reflecting the making of these loans appear in the Appellant’s cash book and its bank statements, and the loans are included in the balance sheet of the audited accounts of the Appellant as part of “other loans” which at 31 December 2002 totalled £42,665.81.
The enquiries made by the Commissioners and the basis of the assessment
15.	Mr Probert visited Mr Deeley on 16 February 2005.  As mentioned, his visit was prompted by delays on the part of the Appellant in making its VAT returns and by the fact that for the year 2002, as well as the two previous years, the Appellant had made repayment returns, which Mr Probert considered unusual for a business such as that carried on by the Appellant, even where it was non-profit-making (the returns for 2003 did not result in a net repayment).  Mr Probert examined during his visit the records and accounts of the Appellant, including the cash book (receipts and expenses) and bank statements.  He noted from the purchase invoices that for the most part expenditure related to bar stocks, with no significant capital expenditure (VAT on capital expenditure could have been a reason for a repayment claim).  He noted a discrepancy between the amount of bar sales and expenses (i.e. the business was operating at a loss), and concluded that either it was a genuine loss or a “paper” loss resulting from an under-declaration of sales.  He would have expected a genuine loss to have been funded in some way, and although he saw some evidence of loans in the cash book, he required further corroborative evidence in order to be convinced.
16.	On 18 February 2005 Mr Probert wrote to Mr Deeley in these terms:  “…the relationship between the total sales declared for the year 2002 and the purchases made, lacks credibility.  An examination of your records has failed to answer this apparent anomaly.  I must therefore conclude that the declared sales do not fully represent the total sales made….”.  Mr Probert attached the calculation he had made which gave the amount of VAT subsequently assessed under section 73(1) VATA.
17.	Mr Probert’s calculation was straightforward:  from the VAT returns made by the Appellant he took the Gross Purchases for the year (total purchases/inputs plus the VAT paid on those purchases), a figure of £95,953;  he then took the Gross Sales for the year (total sales/outputs plus the VAT charged on those sales), a figure of £61,826; to this figure he added the sum of £3,600 for members’ subscriptions (recognising this as non-Vatable income), to give a figure of £65,426.  The difference between £95,953 and £65,426 is £30,527, and to this sum Mr Probert applied the VAT fraction of 7/47 to give the sum of £4,546 as the amount of VAT under-declared, and the amount he then proceeded to assess.  As will be apparent, in this calculation Mr Probert made no allowance for receipts other than sales and subscriptions:  in particular, he took no account of any loans received by the Appellant.  In his evidence to us, Mr Probert referred to the sum of £30,527 as a “hole” which the Appellant needed to “fill” if Mr Probert’s calculation and resulting assessment is to be challenged.
18.	There followed very extensive correspondence between Mr Deeley on the one hand and Mr Probert and various of his senior colleagues on the other.  Much of that correspondence relates to further information and copy records supplied by Mr Deeley, and questions arising from that information, and included Mr Deeley’s attempts to show that he and Citymist Limited had made loans totalling £18,650.  There is more than a touch of asperity in some of Mr Deeley’s letters, although to an extent that may be understandable, since he clearly found it frustrating having to explain the same matters to a succession of Commissioners’ officers, and not infrequently supply copies of the same documents to them.
19.	One swathe of the correspondence relates to the mark-up or margin on sales reflected in the information given in the Appellant’s VAT returns for 2002 relative to the mark-up or margin as appears from the VAT returns for 2004.  The matter was raised again at the hearing before us.  We regard this as irrelevant:  the assessment was made by Mr Probert (as is clear from his letter of 18 February 2005 and internal emails, and as he confirmed in his evidence to us) without any reference to margins or mark-ups – he simply took the arithmetic difference between sales/receipts (to the extent he was prepared to accept them) and purchases – his “hole” of £30,527.  The validity of his assessment must be determined by reference to the way he arrived at it.  The exercise in looking at margins arose only later, seemingly as some sort of cross-check when the matter came to be reviewed by other officers.  It was in any event a flawed exercise, since Mr Probert had not collected detailed information which would have enabled him to make a meaningful comparison of margins in 2002 and the benchmark year chosen (such as the different prices at which beer and other drinks were sold relative to purchase price and any other consequences of different trading conditions; movements in stock over the year; the proportion of stock discarded through wastage).  As such it cannot shed any light on the question we have to decide, namely as to the amount of VAT properly chargeable upon the Appellant for the year 2002.
The parties’ submissions
20.	At the hearing of this appeal Mr Deeley’s evidence dealt first with the history of the Appellant club and the circumstances which had given rise to the difficult trading conditions in 2002, as described above.  He acknowledged that the Appellant had been loss-making for that year in its trading, but he denied that there was a loss (in VAT inclusive terms) of £30,527 which was unfunded.  First he referred to two donations of £375 and £5,642 respectively shown in the audited income and expenditure account of the Appellant:  these were both from the cricket club (the majority of the larger donation was in fact payment for beer provided at cost price for a particular function):  these receipts had not been taken into account by Mr Probert in his calculation, but they went some way towards filling the “hole” he had identified.  Second he referred to the loans from himself and Citymist Limited totalling £18,650.  He showed us in the cash book and in the Appellant’s bank statements where the cash had been received in respect of these various loans, and explained how they were reflected in the audited accounts of Citymist Limited, at least for loans made up to the end of January 2002 (see paragraph 14 above).  If these loans are taken into account as receipts of the Appellant in 2002, then the unfunded deficit identified by Mr Probert is further reduced to a little under £6,000, which, Mr Deeley submitted, fairly represents the “loss” (in cash terms) experienced in an unusually difficult trading year.  In Mr Deeley’s submission, the financial records of the Appellant, when properly understood and analysed, reconciled the VAT returns actually made to the cash and trading position of the Appellant, so that there was no basis for the assessment made by Mr Probert.
21.	Mr Holl, in his submissions, reminded us of the approach which the tribunal should take in “best judgment” cases, and he referred us to the helpful summary of the guiding principles for the tribunal given at paragraph 42 of the tribunal decision in Curry Inn Restaurant v The Commissioners of Customs and Excise (decided in 1998, but unreported):  in essence, if the Commissioners have made an honest and genuine attempt to reach a fair assessment, the assessment cannot be set aside on the grounds that best judgment was not exercised, but nevertheless the focus of the attention of the tribunal should be in looking at the evidence presented to it so as to determine whether the amount of the assessment is correct, and if not, what is the proper amount to be assessed.  We agree that this is the approach we should adopt, as it is consistent not only with the cases cited to the tribunal in the Curry Inn Restaurant case, but also with more recent cases dealing with assessments made under section 73(1) VATA.
22.	Mr Holl also submitted, correctly in our view, that in cases such as this the burden of proof lies on the Appellant, who must produce evidence either to show that the assessment cannot stand because it was not made as to best judgment, or to show that the assessment should stand, but for a reduced amount.  Mr Holl argued that in this case, although Mr Deeley is clearly an honest man and a long-standing and faithful member of the Appellant club, much of the evidence was his oral evidence only, with little by way of corroboration.  That must leave an element of doubt as to whether the Appellant has fully discharged the burden of proof placed on it.
Our decision
23.	First, we decide that the assessment should not be set aside:  in out view the Commissioners, acting through Mr Probert, assessed the amount of VAT due from the Appellant to the best of their judgment within the meaning of section 73(1) VATA.  There was no element of bad faith, capriciousness, spurious element or guesswork on the part of Mr Probert either in the methodology he used or in the making of the actual calculation.  He identified what seemed to him an unusual situation, he made some diligent and careful enquiries from his own examination of the records of the Appellant and by questions to Mr Deeley, and he made an honest attempt to calculate what he considered the true amount of VAT payable by the Appellant in the light of what he discovered.  It is true that in correspondence his attention was drawn to such matters as the loans from Mr Deeley and Citymist Limited, but in the absence of corroborative evidence he was not prepared to take them into account.  That failure on his part does not result in the assessment being invalid on the grounds that it was not made to best judgment.  It is important to note that no duty is laid on the Commissioners in making an assessment under section 73(1) VATA to make an exhaustive enquiry into the taxpayer’s affairs – they must make sufficient enquiry so as to have a reasonable and fair basis for making their assessment, leaving it to the taxpayer, if he wishes, to challenge that assessment by producing the detail from his records to the reasonable satisfaction of the Commissioners.
24.	However, we further decide that the assessment made was excessive and should be reduced to nil.  We reach this decision after taking account of the evidence before us at the hearing, and the facts as we find them to be, as set out above.  The Appellant proved to us, on the balance of probabilities, that the VAT returns it had made were correct, and in particular that any deficit identified by the Commissioners was not attributable to suppressed sales since such deficit was consistent with the trading circumstances of the Appellant and was demonstrably funded by cash receipts.  
25.	We found Mr Deeley entirely convincing as a witness.  He was candid enough to confess that there have been some shortcomings in the record-keeping and VAT compliance by the Appellant, but he pointed out that the Appellant and its business is run entirely by volunteers, so that the standards of a commercial organisation cannot necessarily be expected of it.  He was, however, adamant that matters had been dealt with honestly, so that any suggestions that sales had been suppressed were vigorously refuted.
26.	We accept his evidence as to the difficult trading conditions for the Appellant in 2002, supported as that was by a written statement of one of the trustees.  It was clearly a year of transition as teams and fixtures were reduced, made worse by lengthy periods of cancelled fixtures and closure.  The deteriorating trading conditions were acknowledged, and some remedial action was taken, most obviously reducing prices in the hope of increasing business, but in the result this was not effective.  As Mr Deeley explained, the committee were slow to recognise the changed conditions, and to reduce stocks of beer (which in turn would have meant the loss of incentives from the brewery), and so additional loss was suffered from wasted beer.
27.	There remains the question of the “hole” identified by Mr Probert – essentially the apparent lack of funding for the deficit he identified.  In this regard a significant feature is the loans totalling £18,650 made by Mr Deeley and Citymist Limited.  At the hearing Mr Deeley produced to us the cash book entries and bank statement entries from the Appellant’s records showing the cash received by the Appellant in respect of those loans.  He showed us where those loans are shown in the audited balance sheet of the Appellant.  He explained how the benefit of the loans appeared in the audited balance sheet of Citymist Limited.  In cross examination Mr Holl put it to Mr Deeley that in making such loans (personally and through Citymist Limited) he had been extremely generous in his personal support of the Appellant:  Mr Deeley explained that he had supported the club since its inception, of which he was one of the chief instigators, and he wanted to see it succeed; he said he was in a position financially to make the loans, and that he wanted the club to survive so that others would have the pleasure from the club and the sports it facilitated that he himself had had over the years.  We are entirely satisfied that these loans were made and that the funds were advanced to the Appellant, as described to us by Mr Deeley.  We also accept that the donations totalling approximately £6,000 as shown in the audited income and expenditure account of the Appellant were made and need to be brought into account in identifying the funding of the deficit.  This leaves the unfunded deficit of approximately £6,000 from Mr Probert’s figures, and with respect to that we agree with Mr Deeley that it is a reasonable amount of “loss” to regard as unfunded – put differently, in its own terms it is not of a magnitude as to suggest that sales have been suppressed or other action taken which throws into question the veracity of the VAT returns actually made.
28.	We have one final comment to make about this case:  if the parties had sat down together and worked their way through the issues as happened at the hearing before us, instead of writing at length to each other, frequently, so it seems to us, at cross-purposes and on the basis of misunderstandings and with increasing hostility, it seems highly likely that the matter would have been resolved speedily, satisfactorily and certainly without resort to the appeal process, thereby saving considerable amounts of public funds.  So far as we can see there was no meeting between Mr Deeley and any officer of the Commissioners other than the initial visit of Mr Probert in February 2005.  This does not appear to us to be a sensible way to proceed in a case such as this.
29.	Our formal decisions and directions on the issues for our determination in this appeal are:
(1)	that the Commissioners assessed the amount of tax due from the Appellant to the best of their judgment; and
(2)	that the assessment so made was excessive and should be reduced to nil.
30.	Although in the strict sense the Appellant’s appeal is dismissed, nevertheless, since the assessment is reduced to nil the Appellant has succeeded in its appeal, and therefore we direct that the Commissioners pay the reasonable costs of the Appellant in this appeal, such costs to be agreed by the parties, and if they are not so agreed within three months of the date of the release of this decision, to be determined by the tribunal.

EDWARD SADLER

CHAIRMAN
RELEASE DATE: 14 December 2007

LON/2006/195