< Go Back HMRC and VAT Best Judgement - is that really Best Judgement? Posted: Aug 12, 2021
Tribunal decisions looked at HMRC’s use of ‘Best Judgement’ when raising VAT assessments
with different results for the appellants:
, a Chinese takeaway successfully appealed a £34k VAT assessment
in Brough East Yorkshire Limited v HMRC  TC08213. HMRC, as can often be the case, undertook a
covert review of the business in action and their one-night invigilation failed
to identify any suppression of cash. The
subsequent methodology used in making the assessments in question was also flawed
with poor sampling and a failure to adjust for price changes within the ‘model
‘which led to excessive assessments. HMRC raised a ‘Best
Judgement’ VAT assessment for £34,486.00 covering a six-year period,
together with a penalty of £25,000 coupled with a Personal Liability
Notice (PLN) on the husband-and-wife owners to shift the penalty from the
business to them personally. HMRC made a solitary 'invigilation'
visit on a Friday night. There was no till identified
by the attending officers, suggesting takings were deposited under the
counter. HMRC followed matters up
with a check of credit card and banking information. The total takings for the night of their
visit were circa £1,700. The company's
average takings through the period on Fridays were circa £1,100 so, HMRC boldly
concluded that there must be a suppression of sales of around £600 every Friday
night. The company appealed the VAT
assessment. The penalty and the PLN were not part of the appeal being
heard but if the appeal succeeded then both matters would need to be
subsequently reviewed by HMRC.
grounds for appeal, broadly, were that there was no reliable evidence of
suppression of cash and that HMRC’s methodology was flawed.
Both directors were truthful
witnesses. Sales were recorded from order slips taken at the point of
sale. The order slips were then discarded, and the figures passed to the
company accountants. There was a revised and
advertised menu, with price increases, which had a domino effect in
increasing sales. These factors
were brought to HMRC’s attention but were rejected without meaningful consideration. Recorded cash sales
increased after HMRC's visit but so did credit card sales too; suggesting the
new menu had increased sales generally. HMRC never properly
explained how they thought the Appellant had suppressed sales. HMRC did not adequately challenge
the veracity records maintained.
found that one solitary night’s invigilation is not representative of all previous
VAT periods and that evidence of suppression before the Tribunal was
inadequate. The Tribunal was not satisfied that suppression had taken place and
so concluded the Assessment was unreasonable.
The appeal was allowed.
next case, an appeal against a VAT best judgement failed due to a lack of
credible evidence from the company and its director. In
Awards Drinks Limited (in
liquidation) v HMRC  EWCA Civ 1235HMRC suspected that the
company was involved in tax fraud, but this concern did not displace the usual burden
of proof that lay on the company to explain income received. The Company was a wholesaler
of beers, wines, and spirits, most of its business was transacted through
bonded warehouses in France. It
went into members voluntary liquidation in 2013. HMRC found over 1,300
separate deposits of cash totalling almost £33 Million in UK bank accounts. Most deposits were paid into just three
branches in London. HMRC believed an ‘inward
diversion’ fraud was in play. Enquiries
by the UK and French tax authorities had difficulty tracking down many customers
in France. The company bookkeeping was
unreliable and inaccurate. HMRC issued ‘best judgement’
assessments for over £6.5 Million in VAT .
to the First Tier Tribunal, the burden of proof lay on the company to provide credible
evidence to explain the significant cash deposits in the UK bank account.
Its director provided
contradictory evidence during cross-examination and the Tribunal found him
to be an unreliable witness.
company then appealed to the Upper Tribunal on several points of procedure
including that, as this was, prime facie, a fraud investigation the burden of
proof was moved to HMRC to ‘prove’ its case.
were rejected by the Court of Appeal; although fraud may have been alleged
there was no switching of the usual burden of proof. The company had failed to explain and
evidence the source of the cash deposits therefore, the assessments were valid.
These two cases demonstrate some of the nuances in dealing
with HMRC and how the burden of proof can be shifted to HMRC
if you can provide
adequate explanation and evidence to support your position and undermine HMRC’s. In the first case the appellants were successful,
in the second case not so. This also demonstrates the need to conside such matters at an early stage and plan your responses accordingly to achieve the best outcome.
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