No evidence of suppression of takings: no best judgement

In Brough East Yorkshire Limited v HMRC [2021] TC08213, a Chinese takeaway successfully appealed a £34k VAT assessment. HMRC's one-night invigilation of the food outlet failed to note suppression of cash and the methodology in making the assessments was flawed by poor sampling and failure to adjust for price changes.

• HMRC raised a 'Best Judgement' VAT assessment of £34,486.00 covering a six-year period, together with a £25k penalty together with a Personal Liability Notice (PLN) on the husband and wife owners of  'Gia Hua', a Chinese takeaway providing a range of Chinese and English food.
• HMRC made just a single 'invigilation' visit to the takeaway on a Friday night. There was no till, as far as officers could tell and takings were put under the counter.
• HMRC followed up their enquiries with a check of credit card and banking data and totted up that the Friday's Gross Daily Takings (GDT) were £1,656.91. As the company's average DGT for Fridays were £1,082.94 they concluded that there was a suppression of sales to the tune of around £600 each Friday night.
• In following up the case, the company had not provided any Z readings on tills, or any other breakdown of figures. HMRC also noted that cash takings declared after its visit increased significantly.
• The company appealed the VAT assessment. The penalty and the PLN were not subject to this appeal, as if this appeal succeeded then both would need review by HMRC.

The grounds for appeal, broadly, were that there was no reliable evidence of suppression of cash and that HMRC’s methodology was flawed. 

The Tribunal found: 

• Both Mr and Mrs Hua to be truthful witnesses. Mrs Hua recorded sales from the order slips taken at the point of sale. She did not retain the order slips and she passed her figures to her accountants.
• A new and advertised menu, with price increases, had a domino effect in increasing sales and these were brought to HMRC’s attention but were rejected without further consideration.
• Although recorded cash sales increased after HMRC's visit, credit card receipts increased as well and this provided evidence that the new menu had increased sales.
• HMRC did not adequately explain how they thought the Appellant had suppressed sales and did not challenge the records provided by the Appellant.

Finding that one night’s Invigilation is not representative of the previous VAT periods and simply, that the evidence of suppression before the Tribunal was inadequate. The FTT was not satisfied that suppression had, in fact, taken place. The FTT concluded that the Assessment was unreasonable, inasmuch as it overestimates the amount of under-declared output tax, and also as a result of the failure to consider matters which were clearly brought to HMRC’s attention.

The appeal was allowed.

Comment

It seems careless to base a six-year tax assessment on the results of a single visit, however, a lack of a functional till and daily takings 'z' totals are bound to make HMRC suspicious. It did not assist the taxpayer in defending their position during the enquiry. Under Making Tax Digital for VAT, HMRC expect to find a digital link between gross takings records and bookkeeping records.

Useful guides on this topic

Assessments: Best judgement
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?

How to appeal an HMRC decision
Disagree with a HMRC decision? How to appeal, what type of decision can you appeal and what are your different options when you disagree with HMRC? What are the key steps in making an appeal?

External links

Brough East Yorkshire Limited v HMRC [2021] TC08213