"The element of guess-work and the almost unavoidable inaccuracy in a properly made best of judgment assessment, as the cases have established, do not serve to displace the validity of the assessments, which are prima facie right and remain right until the taxpayer shows that they are wrong and also shows positively what corrections should be made in order to make the assessments right or more nearly right." ( Bi-Flex Caribbean Ltd v Board of Inland Revenue (1990) 63 TC 515, 522-3 PC per Lord Lowry). That was confirmed by this court, after a detailed review of the authorities, in Customs and Excise Commissioners v Pegasus Birds Ltd[2004] STC 1509 ;[2004] EWCA Civ 1015 . We also cautioned against allowing such an appeal routinely to become an investigation of the bona fides or rationality of the "best of judgment" assessment made by Customs: "
“The test in relation to dishonesty is objective. Did the appellant have knowledge sufficient to render his conduct dishonest according to normally acceptable standards of honest behaviour? On the facts of this case the question is simply whether the appellant deliberately understated his takings in order to evade VAT.” 50. Other than the instance where ASL’s scaffolding had been used by his friend, which we accept, Mr Hodges was unable to provide any satisfactory explanation for it being seen at the other locations which were not reflected in the sales records. In the absence of any such explanation we do not accept that the failure to record and account for VAT at the addresses where ASL’s scaffolding was seen can be due to his failure to take reasonable care or as the result of an innocent mistake, rather we find that omission to be deliberate and the consequent under-declaration of VAT to be attributable to the dishonest conduct of Mr Hodges. We also find the inaccuracy in the VAT returns of ASL not only to be deliberate but deliberate and concealed by virtue of it not having been recorded in the documents provided to HMRC by Mr Hodges and ASL. 51. We also find the disclosure of inaccuracy in the VAT returns to have been prompted, as defined by paragraph 9(2) of schedule 24, in that it was discovered by HMRC on an examination of ASL’s records. It therefore follows that we find Mr Hodges to be liable to the VATA Penalties and Schedule 24 Penalties. 52. Given that the quantum of the penalties is dependent on the amount of VAT evaded (VATA Penalties) and potential lost revenue (Schedule 24 Penalties) it is necessary to consider the “best of judgment” assessments. As is clear from Pegasus Birds and Khan our primary task is “to find the correct amount of tax, so far as possible on the material properly available” with the burden resting on the taxpayer. 53. Having considered the calculations submitted by the parties, both original and revised in the light of the evidence of Mr Hodges at the hearing, if HMRC’s revised “sales uplift” of£482,298.50 (as suggested by Mr Haley) is applied to Miss Ross Martin’s average sales per man per day of£399 (from her alternative “free days” calculation) the total number of working days at 1,209 is more than the 1,152 actual working days during the period under review. For Mr Hodges to have generated such additional turnover he would either have had double the amount charged to his customers or increase his work force. Given our finding of fact that Mr Hodges operated as a one man band in a competitive market, we do not consider that the correct amount of tax can be found by the application of the revised calculation suggested by Mr Haley as this, like the “unrefined” original assessment, relies on an uplift based on the very small street sweep sample. 54. However, we have found that there was an under-declaration of VAT by Mr Hodges as a result of his failure to account for work undertaken for all residential customers and consider Mr Hodges assertion that any cash received from ASL’s private customers would be banked and not retained by him to meet business or personal expenses unrealistic notwithstanding the production of several bank statements showing that ASL had an overdraft and regular small cash withdrawals being made. In the circumstances we consider that Miss Ross Martin’s alternative “free days” calculation (which we have appended to the decision) provides the corrections to the original assessment on which the penalties were based to make it, as Carnwath LJ said in Khan v HMRC , referring to Lord Lowry in Bi-Flex Caribbean Ltd v Board of Inland Revenue , “more nearly right”. 55. We therefore find that there was an under-declaration of VAT of£11,153 being£2,718 for the VAT periods 12/06 to 12/08 and£8,435 for the 03/09 to 03/11 VAT periods. 56. Although the total amount of the penalties could be equal to the “VAT evaded” (the VATA Penalties) or 100% of the “potential lost revenue” (Schedule 24 Penalties) HMRC accept that these should be reduced by 30% as a result of the co-operation of Mr Hodges with HMRC. As we did not hear any specific argument on mitigation or reductions for disclosure we also accept that a 30% reduction is appropriate in the circumstances. 57. As it was raised by Miss Ross Martin, we also consider whether there should be any further reduction in the Schedule 24 Penalties for “special circumstances” under paragraph 11 of the schedule. It is clear from paragraph 17(3) of the schedule that we may only substitute our decision for that of HMRC if we think HMRC’s decision was “flawed” in a judicial review sense. 58. In the present case Mr Haley confirmed that HMRC had not considered whether a reduction should be made for “special circumstances”
“We considered a number of other cases which considered these special circumstances provisions, or the similar paragraphs in other penalty statutes. In Hardy v HMRC[2011] UKFTT 592 (TC) and Rodney Warren & Co v HMRC[2012] UKFTT 57 (TC) HMRC never considered the special circumstances provisions, so the tribunals found that the decision was “flawed.”