Appeal Number: EDN/08/178

[2009] UKFTT 48 (TC)

TC00026

Appeal number: EDN/08/178

S73 Assessment: Partnership; one partner bankrupt; appeal proceeding in name of one partner only; repayment claims credibility check; mark-ups on fast selling lines not in line with expected outcomes; local convenience store; unlikely patterns of trading; no adherence to any accepted retail scheme; assessment upheld.

FIRST-TIER TRIBUNAL

TAX

JAVID ASLAM (A Bankrupt)

& ASHIA ASLAM – T/A RAMZAN FOODSTOREAppellant

- and

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS (VAT)Respondents

TRIBUNAL: Tribunal Judge: Mrs G Pritchard, BL., MBA., WS

(Member): Mrs Helen M Dunn, LL.B.

Sitting in public in Edinburgh on Monday 9 March 2009

Mr Stewart Tough - for the Appellant

Mr Kevin Clancy, Shepherd + Wedderburn LLP - instructed by the General Counsel and Solicitor to HM Revenue and Customs for the Respondents©

CROWN COPYRIGHT 2009

DECISION

This is an appeal by Javid Aslam (a bankrupt) and Ashia Aslam who were partners in the business trading as Ramzan Foodstore, (Ramzan) against an assessment to Value Added Tax dated 19/04/07 in the sum of £3,843 for the period 01/02/04 – 31/10/05.

Mr Stewart Tough, accountant appeared for the Appellants. MrKevin Clancy, solicitor of Shepherd + Wedderburn Solicitors, Edinburgh appeared for HMRC.

On the matter of jurisdiction we find that Javid Aslam was made bankrupt on 25/01/06 he therefore has no locus in this appeal. His trustee in bankruptcy had not entered the proceedings. The Tribunal gave this matter some consideration but were prepared to continue the appeal in the name of Ashia Aslam who was a partner in Ramzan and who had not been made bankrupt. Mr Tough had instructions to act for Ramzan.

No verbal evidence was lead for the Appellant. HMRC had two witnesses Kate Henry and Elizabeth McIntyre who were both credible. Written evidence was produced by both parties. Where reference is made to any document in the HMRC bundle it will be prefaced with the word TAB. Where reference is made to any document in the Appellants bundle it will be prefaced with the word ITEM. Where such reference is made the written document will be treated as repeated here.

Law used in this decision

Section 73 Value Added Tax Act (VATA) 1994

Section 83 VATA 1994

Para 2(6) of Schedule 11 VATA 1994

Value Added Tax Regulations SI 1995/2519 Section 68. Public notices numbers 727 and associated numbers.

Van Boeckel v C&E 1981 STC 290

Rahman v C&E 1998 STC 826

All the authorities referred to above were provided in full in a List of Authorities to the Appellant and the Tribunal by HMRC. They are not quoted in full here and may be referred to for their terms in the List of Authorities so provided.

Facts Found

The assessment in issue was made following a credibility check on repayment claims made by Ramzan during the period 07/03 to 01/06. The credibility check was carried out as Ramzan carried on business as a local convenience foodstore from premises at 239 Kirkland Walk, Methil, Fife, KY8 2HZ. It had been registered as a VAT partnership with effect from 01/05/00 to 15/10/06. The VAT registration number was 751 1345 58. Ramzan was unlikely to be a repayment trader.
As Ramzan was a foodstore selling a variety of items, it was entitled to be assessed under any of the available retail schemes or under another retail scheme if that was pre-arranged and approved by HMRC. Ramzan did not have the type of till which recorded every transaction showing the different VAT rates for each of the goods sold, it could not therefore use point of sale calculations for its VAT returns. Ramzan could choose an appropriate scheme without reference to HMRC. Once chosen that scheme required to be followed according to the methodology set out in the VAT Public Notices 727 and associated numbers (TABS 6 & 7 of the List of Authorities).
From an examination of the records which were uplifted from Ramzan or provided by Mr Tough to Kate Henry, the investigating officer, it appeared that Ramzan was not using any of the recognised retail schemes for assessment purposes as provided in the said VAT Public Notices 727 & associated numbers which in the recognition of retail schemes have the force of law. Nor had they applied for approval of any other retail scheme.
There are four available schemes other than point of sale referred to above, only two of which are relevant to this trader. They are (1) Apportionment Scheme 1 and (2) Direct Calculation Scheme 1. Full descriptions of these schemes and how they operate are found in the said VAT Public Notices 727 & associated numbers.
In order to determine the appropriate method for Ramzan HMRC used comparative scales of mark-up for high turnover items. When such an exercise is carried out HMRC would expect to find differences in the mark-up depending on the cost to the Trader of goods sold, or allowances for losses due to the passage of sell-by dates or pilfering, or other grounds, more fully set out below.
Five “lines” were chosen by the Trader as his best selling items for the exercise. Purchase invoices were checked. When these mark-up exercises were carried out the results did not fit any of the recommended retail schemes.
It appeared to the investigating officer Kate Henry from an examination of the books and records that Apportionment Scheme 1 would be easiest for the Trader and HMRC to implement on a routine basis. It is a matter for HMRC’s discretion which scheme will produce a fair and reasonable result.
In particular the investigating officer Kate Henry carried out a check to see if Direct Calculation Scheme 1 had actually been used. From her observations if someone was using Direct Calculation Scheme 1 the use of this scheme must be reviewed each quarter otherwise neither the Trader nor HMRC would get a true picture of the business. It was clear from her calculations which she explained in detail to the Tribunal and which we accepted that Direct Calculation Scheme 1 was not being used. For the purposes of the exercise HMRC had used figures provided by the Appellant or Mr Tough. HMRC did not challenge the figures as no observations had been carried out at the premises. HMRC simply accepted the figures that they were given.
The Tribunal was satisfied that the business had been given the advantage of acceptance of their own figures. We also had no suggestion that the figures provided were incorrect.
The investigating officer Kate Henry expected standard rated mark-ups of anything from 8.44% to 48% on goods for sale with soft drinks for instance at the highest rate. Instead she found a standard calculation of 2.49% for the mark-up which appeared to be an unlikely outcome in a business of this sort. She was satisfied that Direct Calculation Scheme 1 was not being applied.
She preferred to use Apportionment Scheme 1 and proceeded using the same transaction figures from the Appellant or Mr Tough to assess on that basis. She did similar calculations to those of Mr Tough as seen on his calculations ITEM 1. Looking at column J one can see at the quarter 31/10/05 for instance a minus percentage figure which would provide for a VAT return repayment claim rather than payment of VAT.
It was explained and we accepted that this could occur where a trader had taken in a large amount of stock but would not be expected to re-occur over a period as had happened in this case. MrTough had only provided ITEM 1 as his calculations to HMRC on the morning of the Tribunal.
It is for the trader to use an appropriate scheme and to account for VAT within that scheme. If he chooses to use Apportionment Scheme 1 he is under no obligation to advise HMRC of which scheme he is using but he must then carry out his accounting in accordance with that scheme. In circumstances like that he must keep a record of his daily gross takings. He must keep the cost including VAT of all goods received in the period for retail sale at the standard rate; he must also add up the costs including VAT of all goods received in the period for retail sale at the lower rates. He then calculates his output tax by applying the relevant VAT fraction to the standard rated takings and the relevant fractions to the various other proportions of takings respectively. Every year he does a proportionate calculation on the annual figures as a check. If he is dealing in any matters outwith the VAT scheme he must account separately for VAT on such transactions. An example in this case was phone card top-ups. These are provided for the trader for sale at their face value at a figure below face value and the trader is therefore receiving commission. This is outwith the Apportionment Scheme 1 and should be accounted for separately. No separate accounting arrangements were made by the trader in this respect either for Apportionment Scheme 1 or for Direct Calculation Scheme 1. At the end of each tax period it would therefore be possible to calculate what proportion of the daily gross takings comes from sales at the different rates using the step-by-step methodology laid out at page 10 of TAB 6.
As a result of the use of Apportionment Scheme 1 to recalculate the output tax due for the periods 07/03 to 01/06 using the figures provided by Mr Tough and the different rates of VAT applied to them, an assessment in the sum of £3,847.24 had been issued on 19/04/07 for the period 01/02/04 to 31/10/05 being the difference in Ramzan’s accounting for VAT & HMRC’s calculation of sums due under Apportionment Scheme 1. The Appellant was also informed that a repayment claim for the period 01/06 was amended to a repayment in the sum of £143.96.
This assessment was raised after a great deal of correspondence between HMRC and Mr Tough which had provided no further evidence to support his claim that his clients’ returns were correct. Only very late in the day had it been suggested by Mr Tough that Direct Calculation Scheme 1 was in operation but even a cursory look at the methodology disclosed errors which were accepted by Mr Tough. We therefore found Direct Calculation Scheme 1 was not being used or at best was not being used correctly. We also found HMRC had exercised their discretion on the choice of scheme reasonably. We therefore find HMRC’s assessment in this case to be to best judgment.
The assessment figure was rounded down to £3,843 on 25/04/07. This was simply due to rounding down.
A reconsideration was requested but the assessment was upheld on 01/10/08.

Submissions

For HMRC Mr Clancy submitted that the Respondent’s witnesses were reliable. He explained that most traders calculated their output tax and input tax from invoices but for small grocery businesses it was only suitable if the appropriate till was used to calculate output tax from the till rolls, as no tax invoices were used in businesses of this type. HMRC therefore allowed retail traders in this type of business to calculate output tax through the Retail Schemes. Use of these in the first instance depended on turnover. Otherwise the choice was the traders, but he must use the scheme correctly. It must also produce a fair and reasonable result. HMRC can refuse to accept the scheme of choice of the trader even if he is using one scheme correctly if results are thereby distorted. (Para 3.3 – HMRC TAB 3 of the List of Authorities). However in this case HMRC could not identify from the books and records that any of the recognised retail schemes were being used. They therefore did calculations based on the most appropriate scheme and assessed accordingly. Despite a great deal of correspondence no evidence was produced to show that Direct Calculation Scheme 1 was being correctly used by Ramzan. Even if it was being partially used inaccuracies existed which were accepted by Ramzan’s representative.

The questions therefore in order to satisfy the terms of S73 VATA 1994 were:

(1)were the returns incorrect;

(2)had HMRC assessed to best judgment; and

(3)has the Appellant satisfied a Tribunal HMRC has not assessed to best judgment?

Mr Clancy submitted that the evidence had shown (1) and (2) satisfied. He also submitted that the Appellants had not in any measure produced information to meet the requirements of Van Boeckel v HMRC 1981 STC 290 or Rahman v HMRC 1998 STC 826. No criticism lies against HMRC for not seeking out information. The Appellant was asked often if he wished to provide other information. He also referred to Gosai v HMRC 16098 which showed the burden is on the Appellant. The issue of the top up cards being outside the scope of VAT was not an essential matter and had been raised too late.

Mr Tough submitted that it was not “fair and reasonable” to change the scheme from Direct Calculation Scheme 1 which he claims had been used, to Apportionment Scheme 1 just to produce more VAT. He considered HMRC had not looked properly at how Ramzan calculated VAT. He accepted that there were some inaccuracies but stated that “these things sometimes happen”. He also submitted that Ramzan could be in a repayment situation if carrying large stocks.

Reasons for Decision

Ramzan had not been using a legitimate retail scheme accurately for accounting for its VAT. In relation to findings in fact 13 the type of calculation had not been done. Direct Calculation Scheme 1 calculations had not been done either. Had Ramzan been using one of the approved schemes he would not have had any difficulty when a credibility check was carried out, other than perhaps HMRC deciding a different scheme was appropriate which would not have applied retrospectively.

Since no evidence was given by Ramzan it was not possible to find out how they thought they had dealt with the calculation of the VAT. Although Mr Tough submitted that they had followed the Direct Calculation Scheme 1 it was clear from the evidence that this had not been done correctly for example again by excluding phone card top-ups. Had the Direct Calculation Scheme 1 been used then working figures would have been available in respect of expected selling prices. There is an alternative methodology by marking-up the “majority” of their sales if that proves a more straightforward way to do so but it was not clear from the figures produced at ITEMS 1-3, how Ramzan assessed their liability.

The methodology for Direct Calculation Scheme 1 is very clearly set out in TAB 7 and ought each quarter to have reflected price changes, special offers or promotion schemes, wastage, freezer breakdowns, breakages, shrinkage and pilferage of stock. No adjustments appeared to have been made by the trader when the books were examined by the investigating officer KateHenry.

Although Mr Tough provided at ITEMS 1-3 on the day of the Hearing with a calculation of the top-up cards excluded from the VAT returns, it was explained to him that HMRC are under no obligation to carry out exhaustive enquiries, and that this was produced too late and to too little effect.

It is clear from the terms of Van Boeckel and Rahman that it is for the taxpayer to ensure that his returns are correct and can be backed up by records, receipts and bank accounts when requested by HMRC. It is also clear that HMRC had used “Best Judgment” Van Boeckel and Rahman followed.

Decision

The appeal is refused.

Expenses

No expenses are found due to or by either party.

MRS G PRITCHARD, BL., MBA., WS

TRIBUNAL JUDGE

RELEASE DATE: 14 APRIL 2009