L&Y Enterprise Ltd v The Commissioners for HMRC [2026] UKFTT 910 (TC)

[2026] UKFTT 00910 (TC)Case No TC 09919
FIRST-TIER TRIBUNAL
TAX CHAMBER
Hearing Heard on: 24 April 2026Date Judgment date: 17 June 2026
Taylor House Tribunal Hearing Centre, London
Appeal reference: TC/2025/01008
VAT assessments section 73 Value Added Tax Act 1994 – whether best judgment - yes – whether amount of assessments displaced by Appellant – yes - assessments and penalties cancelled and appeal allowed
Before
TRIBUNAL JUDGE LISA CRISTIETRIBUNAL MEMBER JOHN WOODMAN
Between
L&Y ENTERPRISE LTDAppellantTHE COMMISSIONERS FOR HIS MAJESTY’S REVENUE AND CUSTOMSRespondentMr Dhiren Doshi of Doshi Accountants for AppellantMrs Ayanna Henry, litigator of HM Revenue and Customs’ Solicitor’s Office for RespondentsDECISION

Introduction

[1]This is an appeal by L&Y Enterprise Ltd (LYE) against:(1) VAT assessments totalling £91,925 for the periods 12/19 to 09/20 and 03/21 to 09/23 inclusive issued by HMRC on 23 November 2023 pursuant to s 73(1) Value Added Tax Act 1994 (VATA), amended on 28 May 2024 and varied on 6 January 2025 (the Assessments), and(2) penalties of £15,167.63 for careless inaccuracies issued on 25 July 2024 and varied on 6 January 2025 (the Penalties).

preliminary issues

[2]At the beginning of the hearing, an application was made by Mr Doshi (DD) on behalf of LYE for permission to admit the appeal out of time. Following a review conclusion letter from HMRC dated 6 January 2025, the deadline for appeal to this Tribunal was 5 February 2025 and the appeal was notified on 29 May 2025.[3]LYE’s appeal notification asserts that an appeal was emailed on 6 February 2025 and includes a copy of the final page of an appeal signed and dated 3 February 2025. At the hearing Mrs Henry (AH) confirmed that HMRC had seen a copy of an email sent on 6 February 2025 attempting to file the appeal and therefore they were satisfied that there was an attempt to submit the appeal then. The Tribunal accepts that evidence. HMRC did not object to the application.[4]The Tribunal’s discretion to admit a late appeal is exercised in accordance with Martland v The Commissioners for HM Revenue and Customs [2018] UKUT 178 (TCC) (Martland). We took into account(1) that the delay was one day,(2) the reason for the delay, which was that DD was awaiting a signed copy from LYE, and(3) all the circumstances of the case, including that HMRC were not prejudiced by the delay and do not object to the application, and the significant prejudice to LYE if we refused the application.[5]Having regard to the principles in Martland, including in particular the minimal delay, the explanation advanced, the absence of prejudice to HMRC, and the significant prejudice to LYE if permission were refused, we exercise our discretion to admit the appeal, notwithstanding the importance of compliance with statutory time limits.[6]Accordingly, the Tribunal grants permission for the late appeal.[7]An application was also made by DD on behalf of LYE for permission to admit its skeleton argument and additional documents out of time. LYE had been directed to provide its skeleton and any documents it considered to be missing from the bundle by 5pm on 17 April 2026. Additional documents were emailed by DD to the Tribunal and HMRC on 18 April and the skeleton on 20 April 2026. DD sent an email on the evening of 22 April, the day before the hearing, with an additional bundle of documents.[8]On behalf of HMRC, AH said that all bar 3 of the documents sent late were in the original bundle, and that the skeleton and documents were received by the next working day after they were due. HMRC did not object to their admission.[9]We were satisfied that admission of the documents would cause no material prejudice to HMRC and would not disrupt the efficient conduct of the hearing. In accordance with Martland, having considered the length and reason for the delay together with all the circumstances, the Tribunal concluded that it was in accordance with the Tribunal’s overriding objective to deal with cases fairly and justly under Rule 2 of the Tribunal Procedure (First-tier Tribunal)(Tax Chamber) Rules 2009 to admit the documents and skeleton, despite LYE’s failure to comply with directions.[10]Accordingly, the Tribunal admits the late skeleton and evidence.[11]Finally, HMRC confirm that they are withdrawing their defence of the Assessments in respect of the periods 12/19 to 09/20 and 03/21 to 09/21 inclusive, on the basis that these were assessed out of time. They maintain their defence of the Penalties charged in respect of those periods.

background

[12]LYE carries on a business of operating three café/bakeries in Richmond and Teddington in London and has been registered for VAT since 01 June 2010.[13]LYE offers hot and cold food and drink at all three premises, and customers can eat in or take away.[14]According to notes on their system, HMRC conducted a “test and eat” visit at the three premises on 15 May 2019 and noted that there were customers seated in all three, and customers were purchasing hot and cold food with some taking away and some eating in.[15]HMRC wrote to LYE on 23 December 2019 informing it that a compliance check had been opened into its VAT returns. Documents were provided to HMRC including VAT reports, purchase invoices, bank statements and the menu. Due to Covid restrictions and a bereavement in the family of the director of LYE, Mrs Lamisse Hamad (LH), the compliance check was still ongoing in March 2022.[16]HMRC Officer Chris Nicholas (CN) visited Teddington on 31 March 2022 to view the premises and to confirm how VAT was being charged at the point of sale. LH was present to answer any questions, and she explained to CN that she had issues with staff not using the till correctly, she suspected staff of stealing, and the till broke down completely in September/October 2021 and was replaced. As a result, information dating from before the breakdown could not be obtained from the new till. LH also informed CN that the proportion of standard-rated sales was calculated by reviewing the till reports at the end of each day.[17]CN’s notes of the meeting also recorded that LH told him that there is a bakery at the premises, that they sell cakes, croissants and pastries in the shop and that Covid restrictions had a positive impact on trade with the business diversifying into bread and grocery sales. He also noted that there are 22 seats inside two of the shops and 14 seats in the third.[18]HMRC’s Systems and Data Compliance team visited all three premises on 10 May 2022 and obtained till data. HMRC shared the results of the till intervention with LYE’s agent Doshi Accountants (DA) on 26 May 2023. This included sales data and HMRC’s VAT analysis of output tax declared in previous returns compared to output evidenced from the till sales data extraction. This analysis showed that standard-rated sales recorded on the tills had been materially understated in the declaration of output tax on the returns. In the letter CN wrote “After consideration of this information, I trust you will accept that the SR/ZR split has been mis-reported and I suggest that we meet to discuss this further.”[19]DA responded on 6 June, disagreeing with the increased output tax calculation on the basis that they considered that many zero-rated items had been recorded as standard-rated on the till, and saying that they would check their VAT working against HMRC’s spreadsheet for relevant quarters and contact HMRC with their findings.[20]No further response was received from DA despite promptings by HMRC.[21]HMRC Officer Susan Bush (SB) took over the matter and issued a pre-assessment letter to LYE and DA on 15 November 2023 advising that assessments would be raised for £167,746.63 and warning that penalties may also be due.[22]In this letter SB set out how she had calculated the amounts of understated VAT. HMRC only had complete data from all 3 premises for the periods ending 12/21 and 03/22, and she based her calculations on those periods. She compared the standard-rated sales from the till data to the output tax declared for each period to determine the ‘uplift ratio’ in each case. She then averaged the ratio, resulting in a factor of 2.298 and applied this to all periods the subject of the Assessments.[23]DD responded to SB by email on 16 November, saying they had now made their calculations and requesting a meeting in December.[24]SB issued a notice of VAT assessments on 23 November in the amount of £162,738.[25]A meeting took place on 11 December 2023 between SB and DA to discuss the Assessments. SB’s notes on HMRC’s system recorded that DA explained that the reason for the discrepancies was problems with the way staff used the till, using ‘open sale’ instead of pre-priced buttons, but that LH had now trained staff to use only the pre-priced buttons. SB was shown a till report for the month of April 2022 on which LH had ticked all standard-rated items.[26]SB noted that it was not clear how LH distinguished zero-rated items sold as takeaway which would be standard-rated if eaten in, although she was reassured by DA that LH is aware all food that is not cold takeaway is standard-rated. SB also noted it was agreed that LH would be asked to complete a sample week of self-invigilation. DA showed SB a calculation showing that the standard-rated/zero-rated split for October and November 2023 was 26.45%/73.55%.[27]On the system, but not in her contemporaneous note of the meeting, SB noted that it was agreed this may not be a representative sample and that a 40/60% split would be expected with this type of business, and also that she agreed to recalculate the findings from the till interrogation, using an uplift on the turnover figure, to be adjusted for a 40%/60% split to give a more accurate output tax figure.[28]There were subsequent exchanges of emails in January and February 2024. DD sent SB print outs showing revised calculations for standard and zero-rated sales, including the analysis done on the October and November 2023 till rolls showing an average standard/zero-rated split of 26.45%/73.55%. He offered to do a similar exercise for every month in one year.[29]SB responded on 29 February 2024 saying “We have already established that your client has not reported all sales. However, you have not made any uplift to the figures in your reports.” She rejected DA’s calculations showing a different split of standard and zero-rated sales, stating that the till data indicated that the output tax declared had been understated by a factor of 2.298, and that LYE was responsible for setting the percentage rate on which the standard-rated VAT is calculated, and if VAT is charged to a customer then it must be remitted to HMRC.[30]There was a further exchange of emails making the same points, and referring to changes made to the input tax figures.[31]SB wrote to LYE on 28 May 2024 with amended VAT assessments. These were reduced to £92,256 in total to reflect input tax.[32]LYE received a notice of intention to charge a penalty on 6 June 2024 from HMRC which set out the details of how it had been calculated.[33]LYE requested an independent HMRC review of the Assessments on 29 June 2024 and were asked to set out their grounds for appeal. DA did so in emails of 8 and 16 July 2024, stating that the Assessments were based on a standard/zero-rated split that was clearly incorrect, backed by 11 months of till analysis. DA also stated that the business had not changed its trade, trading hours or product mix.[34]On 25 July 2024 HMRC sent LYE a notice of penalty assessment of £15,222.21.[35]SB responded to the points raised by DA in an email of 1 August and DA replied on the same day confirming that LYE wished to have an independent officer review.[36]DA sent till analysis for a 12-month period to the reviewing officer with revised VAT returns and VAT liability summaries.[37]HMRC issued a review conclusion letter on 6 January 2025 upholding the Assessments but varying the amount of them to a total of £91,925 and the amount of the Penalties to £15,167.63.[38]An appeal was notified to this Tribunal by LYE on 29 May 2025.

issues

[39]The issues for determination are:(1) Whether HMRC made the Assessments within the statutory time limits and to best judgment;(2) If so, what amount (if any) of VAT is properly due;(3) Whether the Penalties were lawfully imposed and, if so, in what amount; and(4) Whether any special reduction applies.[40]The Tribunal reaches its conclusions on the balance of probabilities. parties’ submissions HMRC

parties’ submissions

[41]HMRC submit that they made the Assessments honestly and in good faith, adopting a rational and evidence-based methodology, and basing them on the best available information they had at that time, comprising actual data from LYE’s own tills:(1) They conducted a thorough investigation including business visits, till interventions and extensive correspondence with DA over several years providing repeated opportunities for LYE to provide explanations and alternative calculations;(2) The uplift ratio was derived from two periods with complete data and applied consistently across the assessed periods. This method was not speculative; it involved direct comparison between declared outputs and actual recorded sales for the same periods. It was applied consistently, adjusted where appropriate and explained in detail to LYE and DA;(3) They did not assume all sales were standard-rated. The Assessments addressed total under-declared outputs with the standard-rated/zero-rated split aligned to LYE’s own workings; and(4) They considered all information provided by LYE/DA and both amended the Assessments to take account of input tax and marginally adjusted the uplift ratio following review. DA’s own calculations based on a four-month dataset were rejected because they did not include the uplift and there was no reconciliation with historic and verified till figures.[42]HMRC also submit that LYE has not produced credible and contemporaneous evidence showing that the amounts of the Assessments are excessive. Specifically:(a) The four-month dataset provided by DA is incomplete, self-generated, does not correspond to the till intervention data, does not reflect historic settings, and does not include uplift on recorded sales;(b) LYE’s contention that many items were wrongly treated as standard-rated was not supported by reliable operational evidence, consistent till-button usage or staff practice; and(c) LYE has not produced any credible evidence showing the true level of outputs nor any evidence capable of displacing the uplift derived from till data.[43]The inaccuracies in LYE’s VAT returns for the relevant periods resulted in an understatement of VAT and therefore constitute chargeable inaccuracies and the Penalties were correctly calculated by reference to the potential lost revenue arising from the inaccuracies. This applies to all the Assessments, including those for the periods 12/19 to 09/21 for which HMRC are not offering any defence:(1) Inaccuracies in LYE’s VAT returns arose from (a) failure to use till buttons correctly, (b) inconsistent categorisation of items, and (c) reliance on estimates of standard/zero-rated splits;(2) These inaccuracies led to the under-declaration of sales on LYE’s VAT returns for the relevant periods, resulting in an underpayment of VAT to HMRC;(3) The member of staff suspected of theft and subsequently dismissed is unlikely to be the cause of the under-declarations as inaccuracies related to all three establishments;(4) They were only able to retrieve limited data from the tills, which strongly suggests that the till had been reset or historic data removed;(5) The tills have a button for standard-rated or zero-rated items which should have been used. LH’s manual adjustment of the till report at the end of each day is not a satisfactory method of ensuring a true reflection of VAT on sales as it’s not possible to distinguish between eat in and takeaway items;(6) LYE’s conduct clearly constitutes failure to take reasonable care, with the systematic under-declaration across multiple periods and establishments demonstrating inadequate systems and controls; and(7) The Penalties were calculated as prompted disclosures, HMRC applied a 90% quality of disclosure allowance, resulting in a penalty of 16.5% of potential lost revenue.[44]HMRC submit that they have not been provided with any evidence which may allow for a special reduction. However, the Penalties will be suspended if upheld by this Tribunal, which demonstrates proportionate application of HMRC’s discretion.[45]Finally, HMRC submit that the Assessments for the periods 12/21 to 09/23 and the Penalties were issued within the relevant time limits. LYE[46]At the hearing DD, for LYE, stated that he was not making any submissions with regard to the question of whether HMRC used best judgment in the making of the Assessments. However, he went on to make the following points:(1) The analysis of the till data prepared and provided by CN concluded that 92% of all LYE’s sales were standard-rated. This was not a credible result for a largely cold food takeaway business and instead looks like the profile of a restaurant where virtually all food is eaten in;(2) CN had visited the businesses and could see they were not a restaurant. This till data, which was clearly incorrect, formed the basis of the Assessments; and(3) CN’s notes of his visit, which should have been detailed and would usually include his observations as to how many customers were eating in, were not included in the hearing bundle.[47]LYE submits that the Assessments are incorrect, and that rather than owing VAT LYE is entitled to a VAT refund for the relevant periods based on the following:(1) LH was an inexperienced business trader who was not clear about the operation of the tills or VAT. There is however no suggestion that gross sales have been underdeclared;(2) DA, believing the business to be the operation of cafes, had advised that the ratio of standard-rated to zero-rated sales should be estimated to be 40%/60%, and this was the basis upon which VAT returns were submitted;(3) It was only when HMRC visited and extracted till data that LH and DA realised that the tills had not been operated correctly. There were a very significant number of sales categorised as an open item, in some cases up to half of all sales, and sales had not been logged as eat in or takeaway;(4) The sales categorised as open items had been assumed in HMRC’s analysis to be standard-rated, and this was the basis upon which the Assessments were calculated. Given the profile of the business, this was clearly incorrect;(5) The till software was changed, and all staff were trained to use it properly, so that all goods sold were properly itemised and the eat in/takeaway buttons were used correctly;(6) DA then analysed the till summaries, finding that the correct split for standard/zero-rated sales was around 20%/80%; and(7) DA provided SB with this information, but she refused to use it to change the Assessments.[48]With regard to the Penalties, LH agreed that she had acted carelessly in relation to VAT and the operation of the tills but noted that the problem had been hers given that she had overpaid VAT as a result. DD for LYE confirmed they had no issue with the categorisation and calculation of the Penalties, but do not consider them payable because they do not owe any VAT.[49]LYE agreed that the Assessments for the periods 12/19 to 09/21, not defended by HMRC, were out of time, and that the Assessments for 12/21 to 9/23 were made in time. LYE made no submission as to whether the Penalties were notified and issued within the time limit. LYE requested that the Penalties be cancelled or, if not, suspended.

legal framework

[50]Set out below is the relevant legislation, so far as is material to this appeal.

VATA 1994

[24]Input Tax and Output Tax(1) Subject to the following provisions of this section, “input tax”, in relation to a taxable person, means the following tax, that is to say— (a) VAT on the supply to him of any goods or services; ...; and (c) VAT paid or payable by him on the importation of any goods, being (in each case) goods or services used or to be used for the purpose of any business carried on or to be carried on by him.(2) Subject to the following provisions of this section, “output tax”, in relation to a taxable person, means VAT on supplies which he makes…[25]Payment by reference to accounting periods and credit for input tax against output tax(1) A taxable person shall— (a) in respect of supplies made by him, account for and pay VAT by reference to such periods (in this Act referred to as “prescribed accounting periods”) at such time and in such manner as may be determined by or under regulations and regulations may make different provision for different circumstances.(2) Subject to the provisions of this section, he is entitled at the end of each prescribed accounting period to credit for so much of his input tax as is allowable under section 26, and then to deduct that amount from any output tax that is due from him….[26]Input tax allowable under section 25(1) The amount of input tax for which a taxable person is entitled to credit at the end of any period shall be so much of the input tax for the period (that is input tax on supplies and importations in the period) as is allowable by or under regulations as being attributable to supplies within subsection (2) below.(2) The supplies within this subsection are the following supplies made or to be made by the taxable person in the course or furtherance of his business— a) taxable supplies; (b) supplies outside the United Kingdom which would be taxable supplies if made in the United Kingdom; (c) such other supplies outside the United Kingdom and such exempt supplies as the Treasury may by order specify for the purposes of this subsection…..[73]Failure to make returns etc.(1) Where a person has failed to make any returns required under this Act (or under any provision repealed by this Act) or to keep any documents and afford the facilities necessary to verify such returns or where it appears to the Commissioners that such returns are incomplete or incorrect, they may assess the amount of VAT due from him to the best of their judgment and notify it to him…. ….. (6) An assessment under subsection (1),(2) or(3) above of an amount of VAT due for any prescribed accounting period must be made within the time limits provided for in section 77 and shall not be made after the later of the following— (a) 2 years after the end of the prescribed accounting period; or (b) one year after evidence of facts, sufficient in the opinion of the Commissioners to justify the making of the assessment, comes to their knowledge, but (subject to that section) where further such evidence comes to the Commissioners’ knowledge after the making of an assessment under subsection (1), (2) or (3) above, another assessment may be made under that[77]Assessments: time limits and supplementary assessments. (1) Subject to the following provisions of this section, an assessment under section 73 or 76, shall not be made— (a) more than 4 years after the end of the prescribed accounting period or importation concerned, or (b) in the case of an assessment under section 76 of an amount due by way of a penalty which is not among those referred to in subsection (3) of that section, 4 years after the event giving rise to the penalty…..[83]Appeals.(1) Subject to sections 83G and 84, an appeal shall lie to the tribunal with respect to any of the following matters— ……. (p) an assessment— (i) under section 73(1) or(2) in respect of a period for which the appellant has made a return under this Act; or (ii )under subsections (7), (7A) or (7B) of that section; (iii)…. or the amount of such an assessment;…. Finance Act 2007 Schedule 24 57. Error in taxpayer's document[1](1) A penalty is payable by a person (P) where— (a) P gives HMRC a document of a kind listed in the Table below, and (b) Conditions 1 and 2 are satisfied.(2) Condition 1 is that the document contains an inaccuracy which amounts to, or leads to— (a) an understatement of a liability to tax, (b) a false or inflated statement of a loss, or (c) a false or inflated claim to repayment of tax.(3) Condition 2 is that the inaccuracy was careless (within the meaning of paragraph 3) or deliberate on P’s part… Degrees of culpability 3. (1) For the purposes of a penalty under paragraph 1, inaccuracy in a document given by P to HMRC is— (a) “careless” if the inaccuracy is due to failure by P to take reasonable care, (b) “deliberate but not concealed” if the inaccuracy is deliberate on P's part but P does not make arrangements to conceal it, and (c) “deliberate and concealed” if the inaccuracy is deliberate on P's part and P makes arrangements to conceal it (for example, by submitting false evidence in support of an inaccurate figure)…. AMOUNT OF PENALTY Standard amount[4](1) This paragraph sets out the penalty payable under paragraph 1. (2). If the inaccuracy is in category 1, the penalty is— (a) for careless action, 30% of the potential lost revenue, (b) for deliberate but not concealed action, 70% of the potential lost revenue, and (c) for deliberate and concealed action, 100% of the potential lost revenue…. Potential lost revenue: normal rule[5](1) “The potential lost revenue” in respect of an inaccuracy in a document (including an inaccuracy attributable to a supply of false information or withholding of information) or a failure to notify an under-assessment is the additional amount due or payable in respect of tax as a result of correcting the inaccuracy or assessment…. Reductions for disclosure[9](A1) Paragraph 10 provides for reductions in penalties—(a) under paragraph 1 where a person discloses an inaccuracy that involves a domestic matter, …. (1). A person discloses the matter by— (a) telling HMRC about it,(b) giving HMRC reasonable help in quantifying the inaccuracy, the inaccuracy attributable to the supply of false information or withholding of information, or the under-assessment, and(c) allowing HMRC access to records for the purpose of ensuring that the inaccuracy, the inaccuracy attributable to the supply of false information or withholding of information, or the under-assessment is fully corrected…. (2). Disclosure— (a) is “unprompted” if made at a time when the person making it has no reason to believe that HMRC have discovered or are about to discover the inaccuracy, the supply of false information or withholding of information, or the under-assessment, and (b) otherwise, is “prompted”. (3). In relation to disclosure “quality” includes timing, nature and extent….[10](1) If a person who would otherwise be liable to a penalty of a percentage shown in column 1 of the Table (a “standard percentage”) has made a disclosure, HMRC must reduce the standard percentage to one that reflects the quality of the disclosure.(2) But the standard percentage may not be reduced to a percentage that is below the minimum shown for it— (a) in the case of a prompted disclosure, in column 2 of the Table, and (b) in the case of an unprompted disclosure, in column 3 of the Table. Standard % Minimum % for prompted disclosure Minimum % for unprompted disclosure 68. 30% 15% 0% 69. …… Special reduction[11](1) If they think it right because of special circumstances, HMRC may reduce a penalty under paragraph 1, 1A or 2…. Assessment 13. (1) Where a person becomes liable for a penalty under paragraph 1, 1A or 2 HMRC shall— (a) assess the penalty, (b) notify the person, and (c) state in the notice a tax period in respect of which the penalty is assessed…. (3) An assessment of a penalty under paragraph 1 or 1A must be made before the end of the period of 12 months beginning with— (a) the end of the appeal period for the decision correcting the inaccuracy… Suspension 14. (1) HMRC may suspend all or part of a penalty for a careless inaccuracy under paragraph 1 by notice in writing to P.(2) A notice must specify— (a) what part of the penalty is to be suspended, (b) a period of suspension not exceeding two years, and (c) conditions of suspension to be complied with by P.(3) HMRC may suspend all or part of a penalty only if compliance with a condition of suspension would help P to avoid becoming liable to further penalties under paragraph 1 for careless inaccuracy. (4). A condition of suspension may specify— (a) action to be taken, and (b) a period within which it must be taken….. Appeal 15. (1) A person may appeal against a decision of HMRC that a penalty is payable by the person. (2) A person may appeal against a decision of HMRC as to the amount of a penalty payable by the person. (3) A person may appeal against a decision of HMRC not to suspend a penalty payable by the person.(4) A person may appeal against a decision of HMRC setting conditions of suspension of a penalty payable by the person….

evidence and findings of fact

[51]We were provided with a hearing bundle of 5158 pages, an authorities bundle of 340 pages, a supplementary hearing bundle of 502 pages, a further Appellant’s bundle of 127 pages and a Respondents’ skeleton argument of 17 pages.[52]At the hearing we heard evidence from LH for LYE and SB for HMRC. We accept that both witnesses gave honest and reliable evidence.[53]The background set out above is supported by the documentary and oral evidence and the Tribunal finds it proven.[54]At the hearing LH stated that the business was originally started as a bakery with a French twist. She described the outlets as bakeries with seats and said that the main business is takeaway of bakery products.[55]LH described that before HMRC’s compliance check she would provide DA with her daily gross sales at the end of each quarter, and DA would use this to calculate the VAT due. DA understood the business to be a coffee/café outlet and advised that in the absence of a “specific identification epos type till roll”, VAT returns should be made on the basis of a 40%/60% split of standard to zero-rated sales which would be typical of this type of trade. This account is consistent with the documentary evidence; we find it truthful and we accept it.[56]LH confirmed that she was very focused on running the business and not fully involved with the shop floor, and she did not realise until HMRC’s intervention that her staff were misusing the ‘open item’ button on the till. After she became aware of this, she investigated staff practice and terminated two staff members. She re-trained her remaining staff to ensure the tills were being used properly and sought training so she could extract itemised information from the tills. She now provides detailed itemised monthly reports to DA. This account is also consistent with documentary evidence; we find it truthful and we accept it.

Finance Act 2007 Schedule 24

[57]Under cross-examination LH accepted that submitting VAT returns based on estimates carries risk, and that she had not attempted to quantify that risk prior to HMRC’s intervention. She also accepted at the hearing that she had been careless.[58]SB confirmed the following in evidence:(1) she relied on the notes of CN when she took over the matter and did not visit any of the shops herself. She looked at the till data and calculated the uplift percentage. Given the magnitude of the under-declaration, she considered whether this was a deliberate and concealed act. She would have like to have been able to discuss her findings with LH but was not able to make contact. Similarly, she would have appreciated being able to discuss other methodologies with DD but did not have that opportunity;(2) when she was provided with later till rolls by DA, she noticed that a few items were missed that should have been marked as standard-rated, such as croque monsieur sandwiches. She felt that the data did not ring true and was concerned about behaviours that were being demonstrated. She felt that she needed to make the Assessments to bring the matter to a head, with a view to discussing and adjusting them subsequently if needed;(3) SB agreed that all open items were classified as standard-rated for her calculations and confirmed that this was the data from the shops’ own tills. In her view, use of best judgment would not have extended to her being able to change this because use of the till had subsequently changed; and(4) following questions from the Panel she agreed that the gross sales for all relevant periods were accurately recorded, and therefore that the issue is the split between standard-rated and zero-rated sales. She went on to say that she had very little information initially, which is why she made her calculations and came up with the uplift ratio to the declared output tax for each period. She also confirmed that she had not seen the analysis of the till data from CN until the hearing and that she would have been happy to go back and look at the figures if she had had more information. She would have valued the opportunity to discuss specific items, such as the croque monsieur sandwiches, with LH but was not able to make contact. She noted that she was not given any new information in relation to the periods of the Assessments themselves, but was not entirely clear at the hearing as to why she had insisted that the calculations had to include the uplift ratio.[59]The Tribunal found SB’s account to be truthful and we accept it.[60]At the hearing DD pointed us to documents in the hearing bundle which showed the gross sales numbers from DA’s VAT workings from February 2024, together with the gross sales numbers from the till data for the periods 12/21 and 03/22 which formed the basis of the Assessments. These numbers were not materially different. We also note the comments of CN in his letter of 26 May 2026 with a summary of his findings: “After consideration of this information, I trust you will accept that the SR/ZR split has been mis-reported and I suggest that we meet to discuss this further”.[61]The Tribunal finds that any inaccuracies in LYE’s VAT returns concerned misallocation between standard-rated and zero-rated supplies, rather than any suppression of gross takings.[62]DD took us through summaries of the breakdown of sales taken from the till data. The summary of the Richmond shop for the period ending 03/22 showed £33,390.92 of open item sales compared to total sales of £63,226.25. For the same period for Hampton Wick, it was £9,731.39 out of a total of £39,190.88, and for Ham it was £36,346.11 out of a total of £63,041.10. In total almost half of all sales were recorded as open items.[63]This is consistent with HMRC’s record of LH’s conversation with CN on 31 March 2022 where she raised concerns about misuse of the open item button on the till, and with LH’s evidence at the hearing. LH confirmed that the open item is intended to be used for occasional sales of items that are not pre-programmed in the till, such as one-off celebration cakes.[64]We were also asked by DD to consider summaries of detailed till data for the quarter ended 12/24 where standard-rated items had been ticked and totalled. These showed for Richmond £12,930.56 of standard-rated items against total sales of £73,962.31, giving a minimum percentage of standard-rated supplies of 17.48 %, with £12,872.16 of sales marked as eat in. For Hampton Wick there were £5,257.60 of standard-rated items against total sales of £39,909.50, giving a minimum percentage of standard-rated supplies of 13%, with £5,177.38 of sales marked as eat in. The same exercise for Ham showed £8169.20 of standard-rated items against a total of £50,757.48, giving a minimum percentage of standard-rated sales of 16.09%, with £9039.62 of sales recorded as eat in.[65]From the primary facts set out above, the Tribunal makes the following evaluative findings.[66]We recognise that the manual ticking of items may be liable to errors, for example croque monsieur sandwiches were not ticked whereas croque madame sandwiches were. We also recognise that this data does not conclusively demonstrate the value of items which would be zero-rated if taken away but standard-rated if eaten in. While this analysis is not without limitation, we consider that it provides useful evidence of the approximate range of the proportion of standard and zero-rated sales for that quarter.[67]In these circumstances, and on the assumption that the trade did not materially change, we find it inherently unlikely that the entirety of sales recorded as ‘open items’ in the till data used to make the Assessments represented standard-rated supplies.

Standard % Minimum % for prompted disclosure Minimum % for unprompted disclosure

[68]The Tribunal therefore turns to the evidence as to whether the trade had materially changed between the periods of the Assessments and the end of 2024. In CN’s record of his meeting with LH in March 2022 he noted that “Covid restrictions had a positive impact on trade. Business diversified into bread and grocery sales during Covid restrictions.” We find, on the balance of probabilities, that the nature and scale of LYE’s trade changed and that the proportion of zero-rated supplies increased during the periods of Covid restrictions in 2020 and 2021.[69]At the hearing LH stated that the menus, provided in the hearing bundle, had not changed during the relevant periods and we find this proven.[70]On the balance of probabilities, the Tribunal finds it unlikely that the mix of trade had materially changed between the end of Covid restrictions and the end of 2024. On this basis we find it more likely than not that the till data upon which HMRC based the Assessments for the periods 12/21 to 09/23 significantly overstated the proportion of standard-rated supplies being made by LYE.[71]The Tribunal finds on the balance of probabilities that this is also the case for the periods 12/19 to 09/20 and 03/21 to 09/21. discussion Did HMRC make the Assessments within statutory time limits and to best judgment?

discussion

[72]We accept HMRC’s submission that the Assessments for the periods 12/19 to 09/20 and 03/21 to 09/21 inclusive are out of time under s 73(6) VATA 1994. HMRC conducted the till intervention on 10 May 2022, the analysis of this data was completed on 22 September 2022, and the Assessments were issued on 23 November 2023. This means that these assessments were issued more than two years after the end of the prescribed accounting period and more than one year after the evidence of the facts sufficient to justify the making of the assessments came to HMRC’s knowledge.[73]The Tribunal finds that the Assessments for the periods 12/21 to 09/23 were issued within the time limits in s 73(6) VATA 1994 set out above and were also issued within four years of the end of the prescribed accounting period under s 77(1) VATA 1994.[74]Section 73(1) VATA 1994 provides that HMRC “may assess the amount of VAT due from [the taxpayer] to the best of their judgment and notify it to him”. In Van Boeckel v C&E Commissioners [1981] STC 290 (Van Boeckel) the court held that an assessment will be to best judgment provided HMRC consider fairly:
“all material placed before them and, on that material, come to a decision which is one which is reasonable and not arbitrary as to the amount of tax which is due. As long as there is some material on which the commissioners can reasonably act then they are not required to carry out investigations which may or may not result in further material being placed before them.”
[75]This was also considered by the Court of Appeal in Rahman (No 2) v C&E Commissioners [2002] EWCA Civ 1881 (Rahman No 2), which found that the Tribunal has a supervisory role in relation to whether HMRC has used best judgment, and that if an honest and genuine attempt was made to arrive at a reasoned assessment this requirement will generally be satisfied.[76]Applying Van Boeckel and Rahman No 2, the Tribunal is satisfied that HMRC made an honest and genuine attempt to reach a reasoned assessment based on the material available to them. The methodology adopted was rational and not arbitrary. In coming to this conclusion, we have noted that a comprehensive till intervention was made, and HMRC based the Assessments on the two periods for which complete till data was available. There were also business visits and correspondence between HMRC and LYE/DA. We have also noted that CN shared the results of the till intervention with DA on 26 May 2023, and that in response DA said that they would check their VAT working against HMRC’s spreadsheet for relevant quarters and contact HMRC with their findings, but they did not do so despite prompting.[77]In these circumstances, we are satisfied that it was reasonable for HMRC to issue the Assessments in November 2023, and that the Assessments were made to best judgment within the meaning of s 73 VATA 1994.[78]We have also considered whether SB’s refusal to amend the Assessments to take account of the evidence provided by DA before May 2024 as to the standard/zero-rated split of sales in October and November 2023 was reasonable. The Tribunal considers that it was reasonable and not arbitrary for SB to have decided to prefer the data from the HMRC till intervention over the small sample provided by DA for months after the periods of the Assessments.[79]The Tribunal therefore concludes that HMRC made the Assessments for the periods 12/21 to 09/23 correctly, within statutory time limits and using best judgment.

What is the correct amount of VAT due?

[80]However, the conclusion that the Assessments were made to best judgment does not determine that the amount assessed is correct. That is a matter for the Tribunal on the totality of the evidence.[81]In Pegasus Birds Ltd v C&E Commissioners [2004] STC 1509 the Court of Appeal noted that it is the:
“primary task of the Tribunal to find the correct amount of tax, so far as possible on the material properly available to it, the burden resting on the taxpayer.”
We have been provided with material ahead of and at the hearing which was not available to HMRC when the Assessments were made and amended.[82]The Court of Appeal also found in Rahman (No 2) that a tribunal should: “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”.[83]We have therefore considered, so far as possible based on the evidence produced by LYE, whether the amount of the Assessments for the periods 12/21 to 09/23 is correct.[84]We have also considered, for the purposes of determining whether any Penalties are due, whether the amount of the Assessments for the periods 12/19 to 09/20 and 03/21 to 09/21 is correct.[85]We accept that HMRC’s methodology was rational in principle. However, it depended on the assumption that sales recorded as ‘open items’ were properly treated as standard-rated supplies.[86]On the evidence before the Tribunal, that assumption cannot be maintained. The contemporaneous material and oral evidence demonstrate that the ‘open item’ function was widely misused by staff, with the consequence that a substantial proportion of sales were recorded without reliable VAT categorisation.[87]In these circumstances, we find it inherently unlikely that all such sales represented standard-rated supplies. The effect of that assumption is to materially overstate the proportion of standard-rated sales and, consequently, the VAT due.[88]We find it is more likely than not that that the proportion of standard-rated supplies made by LYE for all relevant periods did not exceed the 40% figure used in LYE’s VAT returns.[89]We do not have sufficient evidence to determine with precision the correct proportion of standard-rated and zero-rated supplies for the relevant periods. However, that is not required in order to dispose of the appeal.[90]On the totality of the evidence, we are satisfied that the Assessments materially overstate the value of standard-rated supplies. LYE has discharged the burden of showing that the Assessments are excessive and that no additional VAT is due. It is not necessary for the Tribunal to determine the precise amount of VAT due in order to allow the appeal.[91]In these circumstances, the Assessments for the periods 12/19 to 09/20 and 03/21 to 09/23 inclusive cannot stand and must be set aside.[92]The Tribunal’s conclusion does not rest on a precise reconstruction of LYE’s VAT liability, but on its finding, on the evidence, that HMRC’s Assessments materially overstate the true liability and that no additional VAT is due from LYE for those periods.

Were the Penalties lawfully imposed and, if so, in what amount

[93]The Tribunal accepts that the inaccuracies in LYE’s VAT returns for the periods 12/19 to 09/20 and 03/21 to 09/23 were careless within the meaning of paragraph 3 of Schedule 24 to the Finance Act 2007.[94]However, no loss of tax has been established for the purposes of paragraph 1(2)(a) of Schedule 24 Finance Act 2007. The amount of any penalty is determined under paragraph 5 by reference to the ‘potential lost revenue’ (PLR). In the present case, in light of the Tribunal’s conclusion that the Assessments are excessive and that no additional VAT has been shown to be due, the PLR is nil.[95]In the absence of any PLR the statutory basis for penalties is not satisfied, notwithstanding the careless nature of the underlying conduct.

decision

[96]For the reasons given above:• the Assessments are set aside;• the Penalties are cancelled; and• the appeal is allowed.[97]The Tribunal makes no determination as to any entitlement to repayment.

Right to apply for permission to appeal

[98]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. Release date: 17 June 2026