20936

S73 VATA 1994 – Assessment to best judgment – reasonableness of assessment of drink to food sales ratio – appeal dismissed

MANCHESTER TRIBUNAL CENTRE					MAN/07/1058

 
 	
					IRISH INNS LIMITED	Appellant
	
- and -

THE COMMISSIONERS FOR
				HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

Tribunal:	Ian Huddleston, Chairman
		John Adrain FCA

		
Sitting in public in Belfast on 18th November 2008

Mr. Nigel Thompson, Accountant, for the Appellant
Mr. Bernard Haley of the Solicitors’ Office of HMRC for the Respondents

© CROWN COPYRIGHT 2008

DECISION

The Appeal
1.	The disputed decisions of the Respondents are:
(a)	a Value Added Tax Notice of Amendment of Assessments calculated on the 3rd October 2006 in the sum of £66,257 in respect of tax underdeclared for quarterly tax periods referenced consecutively 07/00 to 10/02, but with the exclusion of the tax periods which are referred to a (b) below;
(b)	a Value Added Tax Notice of Assessments calculated on 6th October 2006 in the sum of £17,488, in respect of over declared tax covering the quarterly tax periods, reference 04/00, 04/01 and 07/02.
Both notices were issued pursuant to Section 73(1) of the Value Added Tax Act 1994.
Facts
2.	The Appellant, at the relevant time, carried on business as a public house from premises at 75 Glen Road, Londonderry, BT48 0B7.  The business activity consisted of bar sales, off sales and restaurant sales, and the Appellant had been registered for VAT since 1981.
3.	The Appellant was the subject of a routine visit conducted by a Mr. Robert Magill, an Officer of HMRC, on the 1st May 2002.  Mr. Magill, following from that inspection, felt that the Appellant’s records were incomplete in the following material respects:
(a)	no purchase records were kept for food;
(b)	no till rolls were retained; and
(c)	there was no analysis of daily income in respect of the three areas of income, namely bar sales, off sales and food.  In fact, as Mr. Magill stated in his witness statement:
“The sales record was a diary with a single sales amount written on the page of the diary relevant to that day.  This figure did not show any breakdown in the sales of food or drink sales, and I was informed that no till readings were kept to help with either the analysis of the sales or to confirm the amounts declared in the diary.”
4.	After that inspection Mr. Magill asked for more adequate VAT records to be maintained and, indeed, again quoting from his witness statement he asked:
“… that a proper VAT purchase and sales record be maintained from the date of my first visit onwards, and although I visited the trader’s accountant on several occasions and was promised that  full purchase and sales record would be produced, none was forthcoming up to and included period 01/03, at which time I was in the process of closing my inspection.”
5.	Mr. Magill visited the Appellant again on the 22nd November 2002 and asked the Appellant’s book keeper, Mr. Emmett Deans, if it would be possible to determine the ratio of food to drink sales, in response to which he was told it would be approximately 60/40% or 55/45% food to drink.  Early in 2003 Mr. Magill was told that information on zero rated purchases would be available for the period 07/02 and 10/02, but no substantive information was provided and, in the absence of any such information, Mr. Magill prepared an assessment calculated on the following basis:
(a)	he calculated the input tax on the alcohol;
(b)	he then grossed that up to establish gross drink purchases;
(c)	to that figure he applied what he felt to be a reasonable profit margin of 120% - in his evidence in chief he indicated that he used that figure because he felt it was, in his opinion, a reasonable industry norm;
(d)	he applied a figure of 45% to that total amount as being representative of the food sales for which he felt that VAT ought to have been charged based on Mr. Dean’s comments.
6.	Resulting from that calculation, he established what he felt there to be a VAT shortfall of £213,014 for the periods 04/00 to 10/02, and issued an assessment for that amount on the 3rd April 2003.
7.	The Appellant asked for a reconsideration which was duly carried out by Deirdre Doherty, a Review Officer of the Respondents based at Customs House in Belfast.  That review was carried out in the autumn of 2003 but, in particular, Ms. Doherty met with the Appellant’s Representative, Ms. Acheson of Moore Stephens, Accountants, on 9th December 2003 to discuss the matter.  At that meeting the Respondents were provided with an analysis of sales, together with supporting till rolls, for the period 18th October 2003 to 18th November 2003.  By Ms. Doherty’s calculations these figures showed a drinks / food ratio of 53:47.
8.	Moore Stephens continued to maintain that changes in the operation of the business ought to have resulted in a different ratio of 62:38.  Two principal reasons were quoted:
(a)	in the period following August 2003 the premises were refurbished, resulting in an extension of the capacity to supply food; 
(b)	the refurbishment included the addition of a new purpose built (and separate) off licence premises with a corresponding increase in drink sales.
9.	In short, Moore Stephens suggested that the period for which till rolls were presented was not representative of the pre-refurbishment trading pattern of the Appellant, and suggested that a period of four months, leading to March 2003, was more representative.  I quote from a letter which Moore Stephens wrote to the Respondents on the 16th March 2005:
“You will recall that figures were submitted for the four month period ending in March 2003 giving a split of 62% / 37% drink to food.  Unfortunately, till rolls were not retained by our clients at that stage due to the sheer volume of these and related storage problems.”
10.	Ms. Doherty, who provided both a witness statement and gave evidence to the Tribunal, indicated, however, that she was not convinced by these assertions – unsubstantiated as they were with any supporting paperwork such as either till rolls and/or the purchase invoices relating to the food purchases – the latter being something which equally could have been used by the Appellant to establish a trading pattern in relation to the sales of food.  The Appellant had already been advised by Mr. Magill both at his initial visit and, subsequently on the importance of maintaining adequate records.  The Tribunal considered that, in light of those warnings, and given the ongoing dispute with the Respondents regarding the VAT return, that it was, at best, surprising that the Appellant did not choose to heed Mr. Magill’s earlier advice and retain records that would have substantiated its claims as to the appropriate ratio between drink and food sales.  
11.	In any event, Ms. Doherty completed her review and, on a without prejudice basis, altered the original 45:55 sales split (food to drink) to a 44%:56% split.  The adjustment, she felt, gave credence to the argument that, prior to refurbishment, there had been increased “off sales”, and the adjustment which she allowed equated, broadly speaking, to £1,110 per week contributing to the off sales total.  The result was the issue of an amended assessment in the amount of £80,712.
12.	The revised assessments were again challenged by the Appellant’s Representatives citing the following grounds for requesting a further reconsideration:
(a)	that the original assessment was raised purely due to the absence of back up documentation being retained, which had raised a presumption of an under declaration;
(b)	that the original assessment was derived from a rough and ready calculation and produced a result which was clearly excessive and largely estimated by adopting the mark up of 120% and a food / drink ratio which “was supplied by the client as an approximation”;
(c)	that the revised assessment was based on records for the period 18th October to 18th November 2003 – a period over a year after the period being assessed, during which period the business had undergone major changes;
(d)	that, using the revised figures, if grossed up and applied to the company accounts for the period, would result in increased turnover in the region of £240,000 for the year ending August 2002, which was excessive.
13.	Somewhat unusually a third review was carried out, this time by Mr. Colin Stockman, who also provided a witness statement and, indeed, gave evidence to the Tribunal.  His review was carried out in June 2006.  Mr. Stockman, both in his witness statement and in his evidence to the Tribunal, confirmed that he had considered the dispute on figures between, firstly, Mr. Magill and, secondly, Ms. Doherty and the Appellant, which focused entirely on:
(a)	the ratio between drink and food sales;
(b)	the mark up which had originally been applied.
14.	In his review Mr. Stockman considered:
(a)	that the Appellant, although it had been asked to on numerous occasions, had not been able to provide alterative substantiated representative figures which equated to the periods of assessment;
(b)	that the Appellant had now asked for the Respondents to consider the trading period 11th November 2002 to 31st March 2003, but that no till rolls for that period had been maintained;
(c)	that accordingly, in the absence of corroborative information, the period from 18th October 2003 to 18th November 2003 had been correctly used as the primary basis for the reconsideration carried out by Ms. Doherty, because there were supporting till rolls;
(d)	that Ms. Doherty had taken into account the changes in pattern of the business by allowing, on a without prejudice basis, a 56:44 split to allow for the change, due in particular to the off sales pattern of trading that would have existed prior to refurbishment.
15.	Mr. Stockman also agreed with Ms. Doherty’s assessment that, to achieve the Appellant’s argued ratio of 62:38% would have required an additional £19,000 of drink sales to be included in the bar figures, equating to £55,000 per quarter – a point which Ms. Doherty had made in her letter of the 26th July 2005 – an overall increase in turnover he felt, notwithstanding the arguments put by Moore Stephens, that equally seemed excessive.

16.	After conducting his review Mr. Stockman:
(a)	maintained the ratio adopted by Ms. Doherty (ie. 56:44) again on the basis that there was no supporting evidence to justify changing it;
(b)	did change the 120% mark up previously applied by Mr. Magill (and left undisturbed by Ms. Doherty).  In that analysis Mr. Stockman looked at the trading accounts for the Appellant for the year end 2001 (in which the mark up of the business was 111%) and for the year end 2002 (when the mark up was 103%).  In relation to those years, he took an average (ie. 107%) and substituted that for the 120% previously adopted in Mr. Magill’s methodology.
17.	Based on that reassessment the assessment was further reduced to an underdeclared sales figure of £66,257 and an over declared figure of £17,486, resulting in net tax of £48,769 which is the amount (excluding interest and penalties) that is now the subject of this Appeal.
Respondent’s Case
18.	The Respondents contention is that in the absence of evidence to the contrary that their assessments have been made to best judgment in the face of a situation where very sparse or no information has been readily made available to them.
The Appellant’s Case
19.	The Appellant’s case is centred on the view that the ratio applied as between drink and food sales was inappropriate because:
(a)	it was based on an original estimation by the Appellant;
(b)	it failed to have due regard to the change in the character of the business post 2003 – with particular reference to the refurbishment of the dining area and the creation of the off sales;
(c)	too great a reliance was placed on the post 2003 trading figures (which had been supplied by the Appellant) which were not representative of the period of assessment.

20.	The implication behind the Appellant’s argument is that it is unfair to penalise the Appellant for its failure to retain the VAT records which would have disproved the Respondent’s assessment (or certainly rendered it unnecessary).  In support of that argument the Appellant’s cited the case of Morga (a firm) –v- C&E Commissioners (1990) (4905).  That case involved a VAT trader who ran a shop selling hot and cold food for consumption on and off the premises.  In that case the till receipts separately recorded the standard rated from zero rated sales, but were themselves summarised by the Appellant each week and then destroyed.  The Commissioners in that case argued that this was done so that those figures showing a greater proportion of zero rated sales could be submitted in the trader’s returns, but the Tribunal held that deliberate and dishonest evasion of tax had not been established given the high degree of probability that was required.
21.	The Appellant argued that that case provided precedent to the Tribunal that there was no requirement to keep till rolls in the present case.
	Conclusions
22.	The principle that a trader should keep sufficient records to make full and accurate disclosure of its VAT affairs is one of the core concepts upon which VAT legislation is based.  It is a primary obligation to which all traders are required to adhere.  Where this information is absent then the Respondents are required (where they feel that there has been an under declaration of tax) to make an assessment to best judgment and are empowered to do so pursuant to Section 73(1) of the VAT Act.  In the present case Mr. Magill adopted what the Tribunal felt to be a sensible methodology:
(a)	he looked at the sales figures for drink sales;
(b)	he grossed those figures up;
(c)	he attempted, based on the information which the Appellant itself had provided, to then establish the percentage of the food sales in respect of which VAT ought to have been charged.  
23.	Mr. Magill did not attempt to argue before the Tribunal that his methodology was perfect, but he did satisfy the Tribunal that it was a reasonable methodology to be applied and, indeed, the methodology itself was not actually attacked by the Appellant.  
24.	The Tribunal finds it significant that the Appellant was given the opportunity throughout the period from the initial inspection in May 2002 through to the assessment which was issued in March 2003 to establish a contrary percentage.  Indeed the Appellant was asked on more than one occasion to provide the zero rated purchase invoices for food from which a contrary calculation could have been deduced.  The Appellant had indicated that it might have had the capacity to do this by reference to bank statements etc., but in any event no such information was later supplied.
25.	Ms. Doherty, when she undertook her review, did give credence to the points which had been made by or on behalf of the Appellant and reduced the ratio to 44:56, resulting in a corresponding reduction in the level of the assessment. 
26.	The Appellant, however, still argued that the adoption of the trading figures for the period October to November 2003 (although these were the only ones supported by till rolls) were not representative, and sought to rely on the earlier representative period from November 2002 to March 2003 – a period for which there was no supporting information.  As indicated, the Appellant relied on the case of Morga (cited above) in support of its argument that the Appellant was reasonable to destroy the till rolls for that period. 
27.	With respect, however, the Tribunal did not agree with that proposition.  The Appellant was told by Mr. Magill as early as May 2002 about the importance of keeping adequate trading records and, in particular, the till rolls to justify the sales ratio between food and drink.  The Tribunal believed Mr. Magill’s evidence that his request had been repeated on more than one occasion.  What the Tribunal finds hard to believe is that faced with the ongoing dispute with the Respondents that the Appellant saw fit to dispose of till rolls which might well have had a considerable impact upon their argument that an alternative ratio of 62:38% was to be applied. 
28.	The question for this Tribunal is if the Respondents, in assessing to best judgement, have acted unreasonably in either failing to take something into account, or taking something into account that they should not have.
29.	It has to be borne in mind that the onus of proof is on the Appellant in this matter and, whilst certainly a credible argument was advanced that a difference in trading patterns occurred post the refurbishment in 2003, nonetheless the Tribunal did not find that there was sufficiently cogent evidence to disprove the Respondent’s earlier concessions on this point and therefore finds that in the absence of such alternative evidence, that the Respondents acted entirely reasonably in adopting the ratio 56:44% as between sales of drink to food.
The Mark Up 
30.	The 120% mark up which Mr. Magill applied, he quite freely admitted in his evidence in chief, was taken from his assessment of comparable trading patterns in other like businesses.  The Respondents, when the review was carried out by Mr. Stockman, reduced that mark up to 107% based on the actual accounts of the Appellant for the financial years ending 2001 and 2002 – essentially taking an average between those two financial years.  Again the Tribunal finds that this was entirely reasonable in the circumstances and upholds that approach.

	Conclusion
31.	Having found, therefore, as a matter of fact, that the Respondents acted reasonably in relation to the two core inputs used in the calculation, it naturally follows that the Respondent’s approach is found by the Tribunal to have been made to best judgment and is upheld.   The Appeal, therefore, is dismissed.
32.	No order as to costs.

Ian Huddleston
Chairman

Release Date : 21 January 2009