20680
VALUE ADDED TAX — assessment based on mark-up of purchase prices — whether mark-up calculations fair and reasonable — Appellants producing no evidence supporting alternative approach — assessment to Commissioners’ best judgment — appeal dismissed

MANCHESTER TRIBUNAL CENTRE

NEW RAILWAY BAR	Appellant

- and -

THE COMMISSIONERS FOR
HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

Tribunal: 	Colin Bishopp (Chairman)
Patricia Gordon

Sitting in public in Belfast on 24 April 2008

Samuel Andrews, accountant, for the Appellant

Bernard Haley, of their solicitor’s office, for the Respondents

© CROWN COPYRIGHT 2008

DECISION

1.	This is an appeal by New Railway Bar, a partnership at the material time of David Ledlie and his wife Vivienne. They traded as keepers of a public house and off licence at premises in Newtownards. They challenge the bulk of an assessment made on 3 October 2005, amending and reducing an assessment first made in December 2004. The Respondents have agreed to make a further adjustment to the amended assessment, the result of which will be to reduce the total amount of tax assessed to £15,510. Of that sum, £3,612 is accounted for by an admitted input tax accounting error. The remaining £11,898 is said by the Respondents to represent an under-declaration of output tax; the Appellants concede some under-declaration but contend it amounts to no more than £1,018. The period assessed is from 1 November 2001 to 31 October 2004 (but, for reasons which were not explained, excluding period 10/02). We understand our decision may have an effect on Mr & Mrs Ledlie’s liability in subsequent periods.
2.	The original assessment was made by Geraldine Murray, following a series of visits to the trading premises she made between November 2003 and October 2004, during which Mr Ledlie provided various items of information, although he and his then accountants did not provide everything Mrs Murray requested. The information she had before her first visit, she told us, indicated that the mark-ups achieved by the business were low, by comparison with those achieved by competitors, and the information she was given confirmed that impression. The problem she encountered was that the Appellants’ accounting records were of poor quality — as Samuel Andrews, the accountant who represented the Appellants at the hearing agreed (he was not their accountant at the relevant time) — and in particular, although tills were used, till rolls were not kept. Mrs Murray asked during her first visit that till rolls be used in future, and she was later given a roll for part of the period assessed, which she treated as reliable evidence of the takings, and of the division of takings between different types of sales, for the whole of the period assessed.
3.	Her assessment led to a protest by the Appellants’ then accountants, which in turn prompted a local review, conducted by Sharon Spence. Mrs Spence told us that she reassessed Mrs Murray’s calculations and assumptions in the light of the representations made by the accountants and took account of the additional information they provided, and made several adjustments, all in the Appellants’ favour. She did not, however, differ from Mrs Murray in her approach to the assessment.
4.	The method used by Mrs Murray, and adopted by Mrs Spence, was to determine the price at which the Appellants had bought goods — alcoholic and non-alcoholic drinks, snacks, cigarettes and cigars — from the suppliers’ invoices (of which a complete set was, it seems, available) and then to calculate the mark-up on those goods by reference to the price lists which Mr Ledlie provided. Some goods, such as draught beer, were sold in the bar but not in the off licence, while others, such as small bottles of spirits, were sold in the off licence but not in the bar. Calculating the mark-up on those goods was simple. Cigarettes and cigars were sold at the same price in both the bar and the off licence. Other items were sold in the bar at one price and in the off licence at a different, usually lower, price;  and it was necessary, in view of the different mark-ups, to establish the extent to which goods had been sold in the bar and the off licence respectively. Mrs Murray did so by reference to the till toll which was provided. Although Mr Ledlie kept separate daily gross takings records (in a notebook) she did not regard those records as reliable since there was evidence of the omission of some takings, particularly from a gaming machine and a pool table in the public house, and of cash payments which had not always been recorded, and she was conscious too that the VAT returns made by the Appellants did not coincide with the statements of turnover recorded in the annual accounts which had been prepared for them by their accountants.
5.	Mr Andrews did not criticise most of Mrs Murray’s and Mrs Spence’s approach, but he did attack the manner in which they went about the calculation of a weighted mark up. The result of that calculation was applied to the purchase price of the various goods in order to determine the gross income of the business and, with it, the correct output tax liability for the relevant period. Mrs Murray took what she told us were the best-selling products within each of several categories — draught beer, bottled beers and other alcoholic products, wines, spirits and tobacco goods — calculated the mark-up on each such product, and then took a simple average within each of the groups. Mr Andrews’ complaint was that neither she nor, on reconsideration, Mrs Spence took account of the volume of each type of goods within each group which the Appellants had sold with the consequence, he said, that the average mark-up actually used might be significantly different from the true average, properly calculated. One example will suffice; one of the categories consisted of seven types of cigarette, all with mark-up percentages in single figures, together with a single type of small cigar, with a mark-up of 16.66 per cent. The effect of the inclusion of the cigars, without reference to the respective quantities of cigarettes and cigars sold, he said, was to increase the average mark-up for the category unfairly. Proper account should have been taken of the possibility (though he put it as more than a possibility) that very few cigars were sold.
6.	Mrs Murray explained that she had taken the view that, since she had selected the best-selling goods, any distortive effect such as that suggested by Mr Andrews would be slight and that any distortion could as easily work in the Appellants’ favour as against them. Neither she nor Mrs Spence considered that the additional work of calculating the relative volumes of sales was justified.
7.	The difficulty facing the Appellants is that it is not enough for them to show that the assessment might be, or even is, wrong; an assessment of this kind will almost inevitably not be precisely, or even approximately, arithmetically correct. The Commissioners are required, by section 73(1) of the Value Added Tax Act 1994, to do no more than assess the tax due to the best of their judgment. Where, as here, a taxpayer’s records are incomplete and unreliable the exercise of that judgment necessarily involves the making of assumptions and estimations, and there is almost always room for a difference of view about the manner in which a calculation should be made, and the extent of the detail which it is necessary to bring into account. In our view the Commissioners cannot be criticised for adopting one approach rather than another unless their so doing leads to a clearly unfair result, is mathematically unsound, or omits the use of available information which, if used, must, rather than merely might, make a material difference to the result.
8.	Mr Andrews’ argument amounted to no more than a contention that, had additional detail been brought into account, the result might have been lower. But, as Bernard Haley of their solicitor’s office, representing the Commissioners, pointed out, that additional detail was available to the Appellants yet Mr Andrews had not produced a calculation of the correct amount of tax backed up by that detail; the calculations he produced were based on assumptions which were not founded on any evidence at all. A taxpayer wishing to challenge an assessment of this kind must, if he is to succeed (and the burden is on him), produce a different figure supported by evidence, which the Appellants have failed to do.
9.	As there is no material before us on which we might properly revise the assessment, the appeal must inevitably be dismissed. There will be no direction in respect of costs.

COLIN BISHOPP
CHAIRMAN
Release Date: 14 May 2008
MAN/07/1124