20763

VAT – ASSESSMENT – high no sales entries –satisfied sale suppression – assessment gave insufficient allowance for genuine no sales – assessment reduced – Appeal allowed in part

MANCHESTER TRIBUNAL CENTRE

	PAUL JOHN MORRIS & MAXINE SMITH  	Appellants

	- and -

	HER MAJESTY’S REVENUE and CUSTOMS	Respondents

			Tribunal: MICHAEL TILDESLEY OBE	 (Chairman)
				      MARJORIE KOSTICK BA FCA CTA (Member)	  

Sitting in public in Birmingham on 24 July 2008

Alan Hinton, VAT Consultant for the Appellant

Bernard Hayley of the Solicitor’s office of HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2008

DECISION
The Appeal
1.	The Appellant was appealing against an assessment for unpaid VAT dated 22 February 2006 and amended on review dated 9 October 2006 in the sum of £13,091 plus interest.
2.	The assessment was made up of:
(1)	Missing takings 		£94 for period 10/04
(2)	Pool table takings		£422 for periods 04/03 to 10/05
(3)	Outside bar takings		£1,142 for periods 04/03 to 10/05
(4)	Till reading No sales		£11,433 for periods 04/03 to 10/05
3.	The sole issue in dispute was that part of the assessment which related to the no sales. The Appellants contended that there was no evidence that they were suppressing sales by using the till no sales button. Further the formula used by the Respondents to calculate the purported suppression was artificial and produced an unfair result. The Respondents contested the Appeal stating that the high use of no sales was indicative of sale suppression. Their calculation of the value of suppressed sales made an allowance for genuine use of no sales.
4.	The issues to be decided by the Tribunal were as follows:
(1)	Did the Appellants demonstrate on the balance of probabilities that their use of no sales was for purposes other than sales suppression?
(2)	If no to question 2 what was the correct amount of VAT due?
The Evidence
5.	We heard evidence from the Appellants. Judith Mooney, the assessing officer, and Andrew Wilkin, review officer, testified on behalf of the Respondents. The Appellants took no point with the non-attendance of the senior officer who accompanied Mrs Mooney. The Officer was absent on long term sickness. We received in evidence a bundle of documents 
The Facts
6.	The Appellants ran a tenanted village public house outside Birmingham as a drinking pub, supplying no food except packaged snacks such as crisps and nuts. They received additional income from a pool table and a gaming machine located in the public house. This was their first venture in the licensed trade. They ceased trading some two years ago. 
7.	Mrs Mooney carried out control visits of the Appellants’ public house on 3 November and 16 November 2005. She found that the no sales entries recorded on the Z till receipts were disproportionately high. During the 9 month period from August 2003 to April 2004 the proportion of no sales to total sales ranged from 10 per cent to 19 per cent, with an increasing use of no sales throughout the period under investigation. The actual number of no sales on any one day ranged from 8 to 106. When Mr Morris was asked about the number of no sales he estimated that no sales would be used about 10 times a day.
8.	Mrs Mooney arrived at the value of the purported suppressed sales attributed to the excessive use of no sales by calculating from the Appellant’s till rolls the average transaction value for each day which was multiplied by the number of no sales takings and then reduced by 20 per cent to give a daily figure for under declared takings. This calculation was performed for each day in a nine month period from August 2003 to April 2004 from which monthly totals of under declared takings were derived. Mrs Mooney then calculated an average monthly figure for under declared takings and the VAT thereon.  The monthly VAT figure was then applied across the period under assessment to produce a VAT debt of £11,433. The 20 per cent deduction represented the allowance given for genuine no sales. The use of a percentage deduction meant that the Appellants did not get the full allowance of 10 no sales for each day.
9.	The Respondents were unable to carry out a full mark up exercise to verify their assessment on the no sales.  Mr Wilkin, however, did a limited mark up exercise for wet sales using the figures in the Appellant’s 2003 and 2004 accounts and the value of the purported under declared sales. This produced a mark up of 99.16 per cent for 2003 and 115.12 per cent for 2004, which Mr Wilkin considered to be within the range of potential mark ups achieved by public houses on wet sales.
10.	Mr Morris regularly served behind the bar. Miss Smith was responsible for the administration of the public house and helped out with the bar during busy periods. The Appellant employed several part-time staff to do the bar work. The Appellants stated they used no sales to give change for the pool table, the jackpot and cigarettes machines, and pay for incidental cash purchases. The Respondents did not advise the Appellants of the potential risks associated with excessive use of no sales. The Appellants had not received training in the use of the till, and failed to become conversant with the operating manual. Mr Morris pointed out that the pool table was in constant use on Fridays and Saturdays which were often the days when high no sales entries were recorded on the tills. He believed that he used no sales more than ten times a day but could offer no explanation for the day when it was used 100 times.  The Appellants denied that they used no sales  to suppress sales.
11.	Mr Morris stated that after the Respondents’ visit in November 2005, they reduced their use of  no sales. The Appellants, however, did not produce records of weekly takings for the period after the November 2005 visit. 
12.	The Appellants supplied an analysis of the gross profit percentages for the seven most popular drinks sold at the public house, producing a range of 40.1 per cent to 47.9 per cent which was in line with the 45.4 gross profit percentage derived from the Appellant’s financial accounts for the year ended 31 October 2004. The Appellants, however, acknowledged that in calculating the gross profit percentages it used different periods for the wholesale and retail prices, which would have had the effect of inflating the percentage for the individual beers.
Decision
13.	Section 73 of VAT Act 1994 empowers the Respondents to raise assessments for unpaid VAT where it appears to them that the taxpayer’s returns are incomplete or incorrect or to recover VAT which has been wrongly repaid or credited as input tax to the taxpayer.
14.	Under section 73 the Respondents were required to consider fairly all material placed before them by the Appellants, 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 Appellants by carrying out an exhaustive investigation of the Appellants’ VAT returns and accounting journals.
15.	In this Appeal Mrs Mooney had reasonable grounds for suspecting that the Appellants’ VAT returns were inaccurate because of the high number of no sales entries on the Appellants’ till rolls. The onus was upon the Appellants to provide a satisfactory explanation for the high no sales entries. Their evidence of the reasons for using  no sales and their denial of deliberately suppressing the sales was inadequate when weighed against the progressive increase of  the no sales entries over the period of the assessment and the overall factual matrix of suppression which included the pool table and outside  bar functions. The Appellants did not supply evidence of the weekly takings following the Respondents’ visit in November 2005, which may have assisted their case. We placed no weight on the analysis of the gross profit percentages for the individual beers and lagers because of the time difference between the wholesale and retail prices. We, therefore, find that the Appellants did not demonstrate on the balance of probabilities that their use of no sales was for purposes other than sales suppression.
16.	The next question was to determine the correct amount of tax due (see Customs and Excise Commissioners v Pegasus Birds Ltd [2004] STC 1509). We consider that the formula used by Mrs Mooney to calculate the value of the under declared sales arising from the use of no sales was logical and based on the actual takings of the business except  the allowance for genuine no sales entries. Mrs Mooney accepted that a daily figure of 10 genuine no sales entries was reasonable, in which case we consider that the assessment should reflect an allowance of 10 genuine entries. During the hearing Mr Wilkin estimated that such an allowance would reduce the assessment by 50 per cent. We, therefore, find that the assessment for no sales should be halved to £5,717.
17.	We, therefore, allow the Appeal in part by reducing the total assessment from £13,091 plus interest to £7,374 plus interest. We consider an award of costs in favour of the Appellant inappropriate in view of our finding of suppression of sales. We make no order for costs.

                                

                                 MICHAEL TILDESLEY OBE
CHAIRMAN
RELEASE DATE: 6 August 2008

MAN/