No best judgement for chippy VAT assessment

In Chrisovalandis Georgiou and others v HMRC [2022] TC 08660, the First Tier Tribunal found that HMRC had based VAT assessments on a flawed methodology and so were not made applying 'best judgement', as required by the VAT rules. The knock on effect of these errors was that  Corporation Tax discovery assessments were not validated either. 

• Georgiou & Co Limited (G&C) operated cash-only fish and chip shops.
• G&C ceased trading in November 2017 and went into Company Voluntary Liquidation in March 2018.
• HMRC commenced a VAT enquiry concluding sales had been suppressed as cash reconciliations for various periods showed that:
  • Cash sales totalled £507k whereas purchases totalled £552k.
  • Cash sales exceeded the gross sales on the corresponding VAT return.
  • Cash purchases exceeded the purchases on corresponding VAT returns.
  • Z readings from the tills did not show dates and times.
• HMRC then raised:
  • VAT best judgement assessments totalling £141k based on average transaction values and numbers of transactions.
  • VAT penalties for Deliberate Behaviour totalling £84k.
  • Corporation Tax Discovery Assessments totalling £230k based on the figures included in the VAT assessments.
  • Corporation Tax penalties totalling £137k based on the reasoning behind the VAT penalties.
  • Corporation Tax assessments and penalties in respect of a Directors Loan account.
  • Personal Liability Notices (PLN) to Mr Georgiou.
• The taxpayer Appealed to the FTT.

  The FTT found that:

• Invigilators sent to the shops to make ‘test’ purchases found that the orders they made were put through the till and the till was not left open.
• HMRC failed to fulfil their burden of proof to show that their VAT assessments had been made to ‘best judgement’:
  • HMRC’s calculations were flawed, contained arithmetic errors and did not take into account the reduction in the number of shops over the period of the assessment, nor did they adjust for short VAT periods.
  • They did not take into account the taxpayers' evidence that sales dropped due to the death of his father, the former proprietor.
  • HMRC did not take into account that some bank deposits were rent rather than sales and some deposits were not queried with the taxpayer.
  • Sampling undertaken by HMRC on two nights was used to extrapolate figures over a four-year period, this was not reasonable or representative of the changes in the business, seasonal fluctuations or fluctuations over the trading week.
  • There was no evidence of the ‘systematic’ suppression of sales that HMRC alleged.
  • HMRC had not explored what the taxpayer had done with the £850k which they alleged the proprietor had removed from the business.
  • The FTT found the HMRC officer had reached the conclusion that there was sales suppression and interpreted all the other evidence accordingly.
• As the VAT assessments had not been raised with best judgement, the penalties and PLN fell away.
• HMRC had not made a valid Corporation Tax discovery as the conclusion the officer reached in finding there was a loss of tax was not reasonable:
  • The officer had simply based the discovery assessment on the VAT assessments and had not exercised her own judgement.
  • The officer should have carried out a credible check to satisfy herself the Corporation Tax liability sought was reasonable.
• As the discovery assessment was not validly raised the associated penalties fell away.
• The FTT supported the general proposition that where cash has not been accounted for and extracted the participator incurs a debt and creates a directors loan account, however, HMRC provided no evidence that the taxpayer took any money for his own use.
• HMRC had not, on the balance of probabilities shown the taxpayers’ behaviour was deliberated as:
  • Mr Georgiou was a credible witness and the FTT did not consider it credible that he reprogrammed the tills to omit sales information. 
  • Cash reconciliations did not prove sales were underdeclared.
  • The undercover visits did not prove there was any sales suppression let alone that it was deliberate.
  • The taxpayer had, as far as they were aware, provide the information HMRC had requested throughout the investigation.

The appeal was allowed.

Useful guides on this topic

Assessments: Best judgement VAT
What is a 'best judgement' assessment for VAT? When can HMRC raise one? What are your rights of appeal? How do you displace a best judgement assessment?

Company Voluntary Liquidation
Under the Enterprise Act 2002, there are two main ways of trying to rescue or save all or part of a company that is in financial difficulties. These are by Company Voluntary Arrangement (CVA) or by Administration.

Discovery Assessments: At a glance (freeview)
What is a Discovery Assessment? When can HMRC make a Discovery? What are the time limits for Discovery Assessment?

Discovery Assessments
When can HMRC issue an assessment outside of the normal statutory time limits? What conditions must be met? What are your rights of appeal and defences?

Penalties: Deliberate Behaviour
What penalties apply to deliberate behaviour? What is deliberate behaviour?

Penalties
Our tax penalties and appeals index.

External links

Chrisovalandis Georgiou and others v HMRC [2022] TC 08660