Chu v Revenue and Customs (VAT - ASSESSMENTS : Best judgment) [2016] UKFTT 665 (TC)

FTT-Tax
Chu v Revenue and Customs (VAT - ASSESSMENTS : Best judgment)
[2016] UKFTT 665 (TC) · 2015-11-24
[27](4) The penalty for a deliberate inaccuracy has been validly imposed. The appellant acted deliberately by not disclosing the full number of people working at the premises and sending away staff and turning customers away on the day of a full day invigilation on 15 June 2013. HMRC has allowed a 20% reduction for giving HMRC access to records. Discussion - caselaw62. The appeal is against an assessment to VAT made by HMRC under s 73 VATA on the basis of their best judgment of VAT due in the relevant period and a related penalty. The approach which the tribunal should take to an appeal against such an assessment is well established in the cases.63. In an early case on this of Van Boeckel v CEC [1981] STC 290 Woolf J gave the following guidance (at page 292):
“ Clearly [HMRC] must perform that function [of exercising their powers in such a way that they make a value judgment on the material which is before them] honestly and bona fide. It would be a misuse of that power if the commissioners were to decide on a figure which they knew was, or thought was, in excess of the amount which could possibly be payable, and then leave it to the taxpayer to seek, on appeal, to reduce that assessment .” 64. In the later case of in Rahman (t/a Khayam Restaurant) v CEC [1998] STC 826 Carnwath J expanded on this. He noted that a two stage approach is required as follows (at page 876) "… the practice is to consider these cases in two stages: (1) consideration whether the assessment was made according to the "best judgment of the Commissioners"; if not, the assessment fails, and stage (2) does not arise; (2) if the assessment survives stage (1), consideration whether the amount of the assessment should be reduced by reference to further evidence or further argument available to the Tribunal…" 65. He then commented on the approach taken by Woolf J in the Van Boeckel case as regards the first “best judgment” stage cautioning that the tribunal should not find that an assessment was invalid purely because it disagrees as to how judgment should have been exercised but that a much stronger finding is required: “… for example, that the assessment had been reached “dishonestly or vindictively or capriciously”; or is “spurious estimate or guess in which all elements of judgment are missing”; or is “wholly unreasonable”” 66. He went on to say that, if he was right in his interpretation of Van Boeckel , it is only in a very exceptional case that an assessment will be upset because of a failure by the Commissioners to exercise “best judgment”
. In the normal case “the important issue will be the amount of the assessment”. He concluded (at page 840) by warning against an “over-rigid adherence to the two-stage approach” and noting “it will be rare that the assessment can justifiably be rejected altogether on the ground of a failure to follow that guidance”. In his view, the principal concern of the tribunal should be to ensure that “the amount of the assessment is fair, taking into account not only the Commissioners' judgment but any other points that are raised before them by the appellant.” 67. In Rahman (trading as Khayam Restaurant) v Customs and Excise Commissioners (No 2) [2003] STC 150 , Chadwick LJ commented with approval on Carnwath J’s judgment in the earlier case. He noted (at [6]) that the first part of two stage approach actually contains two elements: (i) whether the pre-condition to the exercise of the power is satisfied (in other words whether there is a valid case for the issue of an assessment) and (ii) whether the assessment made by the Commissioners was made "to the best of their judgment". 68. At [32]) he formulated the test as to whether “best judgment” has been exercised to be as follows:
"In such cases - of which the present is one - the relevant question is whether the mistake is consistent with an honest and genuine attempt to make a reasoned assessment of the VAT payable; or is of such a nature that it compels the conclusion that no officer seeking to exercise best judgment could have made it. Or there may be no explanation; in which case the proper inference may be that the assessment was indeed arbitrary . " 69. Chadwick LJ continued (at [43]) to give examples of cases where it may be apparent that the power to assess has not been exercised in accordance with “best judgment”, such as where the Commissioners have not taken into account information which was made available to them by the taxpayer before the assessment was made, or can put forward no basis upon which the assessment can be supported. He said that he “suspected that those cases will be rare”. At [44] he noted that in the usual case the tribunal “will have the material before it from which it can see why the Commissioners made the assessment which they did; and may have further material which was not available to the Commissioners when the assessment was made”. In such cases “a tribunal would be well advised to concentrate on the question "what amount of tax is properly due from the taxpayer?"; taking the material before it as a whole and applying its own judgment. . . ." 70. He concluded at [45] that where there is a finding that “best judgment” has not been exercised, the tribunal could take the view that “the proper course is to discharge the assessment”. But even in cases of that nature “the tribunal could choose to give a direction specifying the correct amount….The underlying purpose of the legislative provisions is to ensure that the taxable person accounts for the correct amount of tax."
[71]In the Court of Appeal decision in Customs and Excise Commissioners v Pegasus Birds Ltd [2004] STC 1509 , to which HMRC referred, the court set out an extensive analysis of the previous decisions. Carnwath LJ (as he had then become) noted at [10] that the term "best of their judgment" does not apply a “higher than normal standard but rather is a recognition that the result may necessarily involve an element of guesswork”. It means simply "to the best of (their) judgment on the information available" (citing Argosy Co v IRC [1971] 1 WLR 514 , 517 per Lord Donovan).[72]He continued to note that generally, the burden lies on the taxpayer to establish the correct amount of tax due citing from the case of Bi-Flex Caribbean Ltd v Board of Inland Revenue (1990) 63 TC 515, 522-3 PC (per Lord Lowry):[15]"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."[73]As regards the correct “best of their judgment” test he referred, in particular, to the statement by Chadwick LJ in Rahman (No 2) that what is required is “an honest and genuine attempt to make a reasoned assessment” (as set out in 68 above) which he considered to be an “authoritative statement of the law”. He said that in the light of that statement he would “caution against attempts to refine or add to it, by reference to individual sentences or phrases from previous judgments”.[74]At [23] and [24] he noted that even if it is established that there has been a breach of the "best of their judgment" requirement in relation to some element of the assessment, it does not follow that the whole assessment should be set aside. He noted that this point was touched on in Rahman (No 2) (referring to the comments set out at 70 above). He agreed with the views expressed in Rahman (No 2) that in such cases the tribunal has the power to set aside the assessment or to reduce it to the correct figure. At [29] he said:[29]“Even if the process of assessment is found defective in some respect applying the Rahman (2) test, the question remains whether the defect is so serious or fundamental that justice requires the whole assessment to be set aside, or whether justice can be done simply by correcting the amount to what the Tribunal finds to be a fair figure on the evidence before it. In the latter case, the Tribunal is not required to treat the assessment as a nullity, but should amend it accordingly.” 75. At [38] he gave guidance to the tribunal when faced with "best of their judgment" arguments in future cases which included the following:
“The Tribunal should remember that its primary task is to find the correct amount of tax, so far as possible on the material properly available to it, the burden resting on the taxpayer. In all but very exceptional cases, that should be the focus of the hearing, and the Tribunal should not allow it to be diverted into an attack on the Commissioners' exercise of judgment at the time of the assessment.”
[76]Chadwick LJ agreed with Carnwath LJ’s conclusions but added some observations of his own. He noted at [72] that the issue in the Pegasus Birds case was whether the exercise of “best judgment” required something more than an “honest and genuine attempt to make a reasoned assessment” on the basis of the material then available and whether there was some “objective standard” against which the assessment must be measured.[77]At [75] he accepted that an assessment made “by an officer who had, consciously or unconsciously, "closed his mind" to any material which did not fit his case”, would not be an assessment of an amount due to the best of his judgment. The exercise of judgment, “based on the evaluation of material, requires that the task be approached with an open mind”. He continued that an officer “is entitled to reject material on the basis that, on evaluation, he does not regard it as credible; but he must not reject material on the basis that, before evaluation, he has closed his mind to the possibility that it might be credible. ” 78. However at [76] he rejected the proposition that it follows that, if an assessment is “wholly unreasonable”, it is not the result of an “honest and genuine attempt” to assess the amount of VAT properly due:
“ All that can be said is that an assessment may be so far outside the bounds of what would have been reasonable that it calls into question whether there was, indeed, an honest and genuine attempt to assess the amount properly due......But that is an evidential inference from the facts; it is not a finding that because (although doing his honest best) his assessment fell below an objective standard of reasonableness, he failed to exercise the power to assess to the best of his judgment as a matter of law. ”
[79]Similarly at [84] he noted that if the tribunal finds that assumptions made by the Commissioners in making the assessments were wholly unreasonable that raises the same issue as to whether that “compels the conclusion that [the officer] was not doing his honest best”. Accordingly he concluded (at [85]) that it is enough that the officer through whom the Commissioners act in making the assessment "does his honest best" or that he makes “an honest and genuine attempt to make a reasoned assessment of the VAT payable”. In that case, therefore, the tribunal misdirected themselves as to the proper approach to the "best of judgment" requirement.[80]He also confirmed his views set out at [44] of Rahman (No 2) (see 69 above) and that as he had said at [45] of that case (see 70 above) even where it is found that best judgment has not been exercised the tribunal could give a direction specifying the correct amount. But he added that he suspected that: “the point……is unlikely to arise in practice. In a case where the Tribunal finds that the Commissioners have made no honest and genuine attempt to assess the amount of VAT properly due, the Commissioners are unlikely to seek to uphold the exercise of the power and the Tribunal is unlikely to be persuaded that justice does not require that the assessment be set aside. And, as I said in Rahman (No 2) , the cases in which a finding of no honest and genuine attempt can be made are likely to be rare.” 81. This approach has been followed in numerous subsequent cases. For example, in Mithras (Wine Bars) Ltd v Revenue and Customs Commissioners [2010] UKUT 115 (TCC) , [2010] STC 1370 , Judge Oliver in the Upper Tribunal gave the following useful summary of the approach to stage 2 as follows:[69]“The observations extracted from the decisions in Koca and Rahman 1 emphasise the point that in an appeal against the amount of an assessment, the Tribunal is not restricted to any kind of quasi-supervisory function which involved referring to the Commissioners’ judgment on quantum at the time the Commissioners made their assessment. The Tribunal’s function is truly appellate, in that it can consider further information or argument at the hearing of the appeal and reduce the amount of the assessment, thereby substituting its own view on quantum for that of the Commissioners. However, as is clear from Khan v HMRC , the burden is on the Company to establish the correct amount of tax due and unless and until it can establish otherwise the assessments “remain right”……. the Company has not been able to establish that these assessments are wrong or positively show what corrections should be made to make them “right or more nearly right”. Discussion - decision 82. Following the approach in the cases the first question is whether HMRC was entitled to raise an assessment and, if so, if they have made an honest and genuine attempt to make a reasoned assessment of the VAT payable. It is only if these conditions are not satisfied, that the assessment can be found to be invalid in its entirety. If that is not the case, it is clear that the assessment cannot be rejected in its entirety but the tribunal can consider whether the amount of the assessment is correct or should be adjusted. The burden is then on the appellant to show that the amount of the assessments are wrong and also to show positively what corrections should be made in order to make the assessments right or more nearly right. 83. HMRC have raised the assessments essentially on the basis that Mrs Gray’s visits to the nail bar established that the appellant has not been declaring the full takings of the business and therefore has not been accounting for sufficient VAT. This is on the basis that transactions with customers, which Mrs Gray says she witnessed taking place, were not recorded by the appellant. Much, therefore, turns on Mrs Gray’s evidence. 84. We found Mrs Gray to be a credible witness. She had a good recollection of the events in question and was firm and consistent in her account of what happened. Her recollections are supported by written notes made shortly after she visited the appellant’s business premises and some contemporaneous notes albeit that, understandably in the circumstances, these were limited to recording items such as the figures she heard. We accept her account that she did not have difficulty in hearing due to background noise; none of the officers who had visited found the premises particularly noisy. We accept her evidence as to what happened on each of her visits to the appellant’s business premises. 85. It is clear that nearly all of the transactions Mrs Gray recorded as having taken place in the nail bar were not recorded in the records of the daily takings of the business kept by the appellant. We note that the appellant accepted that those transactions were not shown in his records. He could not provide any explanation other than asserting that they must not have taken place as Mrs Gray says she witnessed. As set out, we accept Mrs Gray’s evidence for the reasons given above. 86. We have concluded, therefore, that in the periods in question, the appellant has not declared all supplies made by the business for VAT purposes. On that basis it is clear that HMRC had a sound basis for seeking to impose additional VAT by assessing (under s 73(1)) the additional amounts of VAT due to the “best of their judgment”. 87. Mr Popoola is the officer who made the relevant calculations on which the assessments were issued. The appellant submits that Mr Popoola was not acting honestly and nor were the other officers who attended his business premises on the fully day invigilation and other occasions. In particular the appellant asserts that:(1) Mr Popoola has no justification for the assumption that the business would have made the assumed level of profits per hour he asserts; the level of treatments which HMRC has assumed took place within the time span of 1 hour is simply not feasible given how long treatments may take. This is evidence of a dishonest and vindictive approach.(2) The 60% and 50% reductions Mr Popoola has allowed are simply figures plucked out of the air.(3) It is wholly capricious for HMRC to base their figures for Saturdays on the assumption that 5 staff were working. Mr Popoola has exaggerated what happened as regards customers being turned away.(4) The officers have given inconsistent evidence, in particular, as regards whether cash reconciliation exercises were carried out. The appellant claims that these were carried out on each visit and Mr Popoola did not want to reveal this as the results support the appellant’s position. 88. We also note that the appellant said that he found Mr Popoola to be a frightening and intimidating person. The appellant also casts doubt on HMRC’s evidence as, in some cases, notes were not taken by the officers involved and the appellant was not given such written documents as exist for some time which was also asserted to have hampered the preparation of his case. It appeared that the appellant’s adviser had had the documents for sufficient time to prepare for the case such that there was no prejudice to the appellant in that respect. We do not see any reason to draw any adverse inference from any delay in copies being produced as to the reliability of such documents as evidence. 89. There are inconsistencies in the accounts of some of the officers who gave evidence, in particular, as regards what happened on the full day invigilation as regards when the appellant arrived and who spoke to him, details about the premises and, as regards whether there was a cash reconciliation on that day. It appeared that these inconsistencies were due to the fading of memories given the elapse of time since these events occurred until the time the witness statements were made and the hearing subsequently took place. 90. That the officers could not remember full details of the premises as regards, for example, how many chairs there were in the waiting area or the precise layout of the premises, we find not surprising given the time that has passed. Such matters were not the focus of the visit or note taking which took place subsequently. As regards who first spoke with the appellant on the invigilation day, we prefer the evidence of Mr Clayton give that this was supported by notes prepared shortly after the visit. The fact that Mrs Bramble could not recall a cash reconciliation taking place that day but that she had signed a note confirming that was the case appears to demonstrate that she had very little, if any, actual recollection of the events in question. 91. These inconsistencies do cast doubt on the weight which can be attached to the evidence given by the officers as to certain aspects of what happened on the invigilation day and, in particular, we consider that the evidence of Mrs Bramble as regards that day cannot be relied on. However, overall we do not consider that they cast doubt on the honesty of the officers concerned or raise any suggestion that the assessment was raised otherwise than in an honest attempt to make an assessment of the VAT due. We note that the factual matters to which the discrepancies relate do not themselves have any material bearing on whether HMRC was entitled to issue an assessment; that is established by the fact that the appellant had been under declaring his takings for VAT purposes according to Mrs Gray’s clear evidence and the appellant’s own records. 92. As regards Mr Popoola, he appeared to have a good recollection of events which is perhaps consistent with him being the lead officer in this matter. In general his witness evidence was consistent with the quite detailed written notes that he had made at the time (or shortly after the relevant visits to the premises). 93. The appellant states that Mr Popoola is concealing that other cash reconciliations were carried out because that would support the appellant’s case that he had correctly accounted for all VAT due. Mr Popoola was clear that he had carried out a cash reconciliation only on the occasions he said he had in his witness statement and that he had not instructed other officers to given incorrect information in that respect. The other relevant officers also said that they had not carried out other cash reconciliations and they had not received any such instructions from Mr Popoola. We note Mrs Bramble’s evidence on which we have already commented. Whilst we found Mr Popoola to be a forceful person with firm views on the matters in dispute, we did not have any doubt from his evidence that he was acting other than honestly. We accept his evidence as regards the cash reconciliations. We note that, in any event, the suggestion that further cash reconciliations would have supported the appellant’s position in any material way is wholly speculative. The evidence is clear that the appellant has not declared the full takings from his business for VAT purposes. 94. Looking at all the available evidence and the method of calculation which Mr Popoola adopted, we had no real doubt that his energies were focussed on ensuring that the appellant paid the right amount of VAT on the information available to him and that he made an honest and genuine attempt to make as reasoned an assessment of the VAT payable as he could. There is no evidence that Mr Popoola did anything other than attempt to assess the available information with a view to making such an assessment or that he closed his eyes to any relevant information. 95. Mr Popoola based his calculation of the VAT due for all days other than Saturday on the amount of takings which Mrs Gray’s visits had exposed were missing from the declared takings for any given period of time. He then extrapolated from the amount of takings which were missing in a given period of time, an equivalent amount for the rest of the period of 1 hour and assumed takings at that same rate for each hour on which the business operated on the day in question. He then gave a 60% discount. For Saturdays he took the actual takings from the full day invigilation but increased to reflect what would be earned if 5 staff had been present instead of 3 as was actually the case. This was on the basis that he believed that the appellant was deliberately sending the staff away and taking measures to ensure the takings were kept low. For that day he gave a 50% reduction. 96. We note that Mr Popoola gave the appellant an opportunity to provide revised figures for the takings but the increases of £5,000 and £10,000 suggested by his accountants were clearly, in light of HMRC’s findings, unrealistic. 97. In such circumstances, seeking to use the missing amounts, as established by Mrs Gray’s visits, and the actual takings on the invigilation day, is not an unreasonable approach. We note that the percentage reductions given are somewhat arbitrary but they are intended to benefit the appellant and, in the absence of any further information provided by the appellant, an element of guesswork, as the courts recognise, is somewhat inevitable. We certainly cannot see that adopting this approach could be characterised as evidencing any vindictive or dishonest approach as the appellant has asserted. We note that, as set out below, we consider that increasing the figures for Saturdays on the assumption that 5 staff were working is not reasonable and the figures should be adjusted to reflect that. However, our view is that this does not undermine the validity of the entire assessment but rather goes to the correct amount of the assessment. 98. Overall, therefore, for all of the reasons set out above, we do not see any reason, from the approach taken by Mr Popoola, that would justify a decision that the assessments are not valid in their entirety. Accordingly, we have continued to consider whether the amount of the assessments should be subject to any adjustment bearing in mind that it is for the appellant to provide information as to what the correct amount of the assessment should be. 99. The appellant has essentially put forward two matters potentially affecting the amount of the assessments. The first is that it is wrong for the takings for Saturday to be increased on the assumption that 2 further staff were working. The second is that the appellant could not have provided the amount of services in an hour which HMRC have assumed were provided in that time in their calculations. The appellant notes that it does not follow that because, for example, 5 lots of payment were received in 1 hour, that all of the treatments took place fully in that hour given the length that treatments take. So, for example, it could be the case that, at least some of the customers arrived before that 1 hour period or that other customer’s treatments would be carried out over part of the following hour. So Mr Chu asserted that the figures for each hour should be lower than that assumed by HMRC although no calculations were produced to demonstrate that. 100. As regards the staff members working on Saturday, we consider that there is insufficient evidence to conclude that, on the balance of probabilities, there would usually be 5 staff working in the nail bar on a Saturday and that the appellant deliberately sent members of staff away on the invigilation day. We note that on some of Mrs Gray’s visits she says there were 5 staff although it is not clear whether that includes the appellant and his wife. Otherwise most of the reports as regards the various visits by HMRC officers were of a maximum of 3 or 4 members of staff being present (again it not being clear whether that included the appellant and his wife). It is plausible that staff members left at certain points to take a break (and Mr Clayton and Mrs Baptiste described in their witness statements a member of staff as leaving and then returning on the invigilation day). We consider that the takings for Saturdays should be regarded as the actual takings on the invigilation day as recorded by HMRC and that the assessments and related penalty should be adjusted to that extent accordingly. 101. The position as regards the correct level of missing profits to be assumed for each hour, we find to be more difficult. The problem is that, other than saying that HMRC’s calculation is not correct in this respect, the appellant has not put forward anything positive about what would be the correct number of treatments and profits (other than simply asserting the original figures are correct which we cannot accept given we have found takings have been under declared). As noted, it is clear in the case law that in these circumstances the burden of proof is on the appellant to demonstrate what the correct figure (or a more correct figure) should be to displace HMRC’s assessment. We note that looking at the appellant’s own figures as to the number of treatments in effect carried out per hour and those in effect assumed by HMRC’s calculations, overall the position assumed by HMRC does not appear unreasonable in particular given the substantial discount then given by HMRC in the resulting figures (of 60% and 50%). In the absence of any further information from the appellant, we find that we are not able to make any adjustment to the assessments in this respect. 102. As regards the penalty, our view is that HMRC have correctly raised the penalty on the basis that the act which enables HMRC to assess the VAT as due from the appellant was “deliberate but not concealed”. In our view, on its natural meaning, the use of the term “deliberate” in this context requires that the relevant person must to some extent have acted consciously or with intent as regards the circumstances which resulted in the inaccuracy in the VAT returns. We find that is the case given that it is clear that the appellant has not declared the full amount of takings which therefore gave rise to the under declaration of VAT due. 103. As set out in full above the penalty can be reduced where a person discloses an inaccuracy by (a) telling HMRC about it, (b) giving HMRC reasonable help in quantifying the inaccuracy or (c) allowing HMRC access to records for the purpose of ensuring that the inaccuracy is fully corrected. The level of reduction depends in part on whether the disclosure is “unprompted” or “prompted”. The disclosure is “unprompted” if made at a time when the person making it has no reason to believe that HMRC have discovered it or are about to discover the inaccuracy and otherwise is prompted. We agree that HMRC have correctly treated this as a prompted disclosure rather than an unprompted one given that HMRC established the under declaration only on carrying out their own investigation. HMRC have given only a reduction for the final category of allowing HMRC access to records for the purpose of ensuring that the inaccuracy is fully corrected. In these circumstances, we cannot see any basis for allowing for any reduction under the other categories or that there are any special circumstances which would justify a further reduction. Conclusion 104. For all the reasons set out above, we have concluded that the appellant’s appeal is not allowed except that the calculation of the VAT due for the relevant periods and the related penalty should be adjusted by HMRC to take into account our finding that the calculation of the takings of the appellant’s business for Saturdays falling in the relevant period should be based on the actual takings of the business recorded by HMRC on 15 June 2013 as set out in 100 above. 105. This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice. HARRIET MORGAN TRIBUNAL JUDGE RELEASE DATE: 30 September 2016