Parvaiz Akhtar v The Commissioners for HMRC

This is an appeal against VAT assessments for the periods 12/19 to 03/23 amounting to £29,199.19.

The appellant (Mr Akhtar) operates an off-licence which also sells groceries, cigarettes and lottery scratch cards. He has been registered for VAT since 1 December 2019.

On 24 May 2022 HMRC visited the business by arrangement to check the VAT records and returns. Mr Akhtar was asked to have available his accounts, bank statements, VAT account and working papers, sales and purchase day books, cash books, petty cash books and ledgers and sales and purchase invoices. He was also ask to provide supporting documents such as correspondence and contracts as appropriate.

At the visit, HMRC established that business had an electronic cash register. They were advised that no till data was held, as there were no journal rolls in the till. HMRC explained that till rolls and journal rolls should be installed and z-readings should be kept as part of the business’ prime records. Mr Akhtar told HMRC that he retained a notebook containing the daily gross takings although he did not provide this.

Mr Smith advised HMRC in a telephone call in June 2022 that the sales figures reported in the VAT returns for the business were calculated by applying a mark-up of between 20% and 30% to purchases to calculate the sales figures; he did not receive z-readings or information from the sales daybook to calculate sales.

Following the visit, HMRC wrote requesting that Mr Akhtar install an ink cartridge to improve the printed reports and to have the following information available for the next visit in October 2022:

On 5 October 2022 HMRC returned to the business. They were advised that journal rolls had not been kept but were provided with a number of z-reading reports. Following correspondence and unsuccessful attempts to visit the business again, HMRC issued a best judgement letter on 4 May 2023 with calculations based on the information provided for the 06/22, 09/22 and 12/22 VAT periods.

There was further correspondence and Mr Akhtar subsequently advised that the till had broken before Christmas 2022 and he was using a borrowed till. HMRC attempted to arrange a further meeting and advised Mr Akhtar by letter that failure to attend a further meeting would result in the information provided to date being used to raise a final best judgement assessment for the periods 12/19 to 12/22 inclusive. Mr Smith responded to say that he wanted to see that final assessment before deciding whether Mr Akhtar would attend a further meeting or appeal to the Tribunal.

The assessments under appeal were issued on 29 August 2023. On 4 September 2023, Mr Akhtar requested a review of the assessments.

On 18 October 2023, a review conclusion letter was issued upholding the assessments. Mr Akhtar appealed to this Tribunal on 7 November 2023. The grounds of appeal were (in summary):

S73 Value Added Tax Act 1994 (VATA 1994) provides that:

“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.”

There was no dispute that the assessments had been raised within the time limits in s77 VATA 1994.

The meaning of ‘to the best of their judgment’ is set out in Van Boeckel v Customs and Excise Commissioners [1981] STC 290 (at p 292):

“What the words ‘best of their judgment’ envisage, in my view, is that the Commissioners will fairly consider 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.”

Further guidance was given in Carnwath J in Rahman (t/a Khayam Restaurant) v CEC [1998] STC 826 (at p835):

“… there are dangers in taking Woolf J’s analysis of the concept of ‘best judgment’ out of context … the tribunal should not treat an assessment as invalid merely because it disagrees as to how the judgment should have been exercised. A much stronger finding is required; for example, that the assessment had been reached ‘dishonestly or vindictively or capriciously’; or is a ‘spurious estimate or guess in which all elements of judgment are missing’; or is ‘wholly unreasonable’. In substance those tests are indistinguishable from the familiar Wednesbury principles (see Associated Provincial Picture Houses Ltd v Wednesbury Corp [1948] 1 KB 223). Short of such a finding, there is no justification for setting aside the assessment.”

In effect, in exercising best judgment an HMRC officer is simply required not to be arbitrary or to guess, he must not act from wrong motives, and he is required not to act wholly unreasonably. But he is not required to be as right as it is possible to be.

The position was also confirmed in in Customs and Excise Commissioners v Pegasus Birds Ltd [2004] EWCA Civ 1015 at [38(i)] which also cautioned against allowing an appeal routinely to become an investigation of the bona fides or rationality of the “best of judgment” assessment made by Customs:

“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.”

The burden of proof as to best judgement is on HMRC, and we had a witness statement and oral evidence from Officer Marie Calderwood, who had worked on the matter from May 2022 and raised the relevant assessments.

For Mr Akhtar it was contended that the assessments were not made to best judgement because (in summary):

For these reasons, it was contended that the proposed gross profits were not achievable.

In the hearing it was also explained for the first time that Mr Akhtar’s daughter worked in the shop on a Sunday. She worked in order to enable him to take a day off; she was not called as a witness.

HMRC contended (in summary):

HMRC therefore contended that the assessments were based on material provided, which had been fairly considered, and that the decision was reasonable and not arbitrary. Mr Akhtar had declined to provide any other material for HMRC to consider.

The provisions of s73 VATA 1994 were clearly met: Mr Akhtar had not kept the business records that he was required to keep, even after HMRC had advised him that he needed to keep such records following the initial visit.

It was put to Officer Calderwood that the assessments were not made to her best judgement because she had followed the advice of a technical officer, particularly with regard to extending the assessments over all periods from the start of the business in late 2019. We accept Officer Calderwood’s evidence that, although she consulted with others, the decision was hers. Although the initial calculations were for fewer periods, she later concluded, before raising the assessments, that suppression in the periods for which till data was available would have been in place from the outset.

We have noted the contentions made for Mr Akhtar. We note also that there was no dispute that the business was open throughout the COVID restrictions and consider that any impact of COVID is already taken into account in the assessments through the assessment mechanism of calculating an uplift to be applied to declared sales. If COVID had an impact on the business, the lower sales of those periods would be reflected by the uplift mechanism. As noted below with regard to quantum, the declared takings do not show any impact on the business – declared takings in fact increased during 2020. As such, we do not consider that the lack of adjustment for the impact of COVID means that the assessments are not made to best judgement.

We consider that the contention that HMRC have not considered the explanation as to lottery tickets is not made out; HMRC clearly did consider the explanation but concluded from the information available that the lottery cards and bus stop change explanation for no-sales did not appear plausible or merit an adjustment to the assessment. We do not think that was an unreasonable conclusion, for reasons set out below with regard to quantum (and we note that we had the benefit of additional material which had not been provided to HMRC when the assessments were made).

We consider that the contention as to gross sales profit is more properly an argument as to quantum rather than whether or not the assessment is made to best judgement; to the extent that it was intended as an argument that HMRC did not consider whether it was realistic for the business to make this level of profit, we note that this point was not put to Officer Calderwood. The decision in Van Boeckel makes it clear that HMRC are required to consider the material placed before them; they are not required to try to obtain more material to consider.

If the reference to Mr Akhtar’s daughter working in the shop on Sundays was intended to be a contention that she may have made errors which led to the over-rings, we consider that this was an argument as to quantum. There was no mention of her working in the shop in correspondence or discussions before the hearing and so this is not material which was available to HMRC in making the best judgement assessment.

Mr Smith also commented several times that the initial calculations produced by HMRC had produced a result below that of the sales amounts declared by the business. To the extent that this was a contention that the final assessments could not be to best judgement, we disagree: it was clear from HMRC’s evidence that further work was undertaken between those initial calculations and the final calculations and that Mr Akhtar had declined the opportunity to discuss the figures with HMRC.

Bearing in mind the caution in Pegasus Birds, we find that the assessments were made to best judgment as they took into account all of the material available to HMRC at the time and we consider that they were not made “dishonestly or vindictively or capriciously”; they were not a “spurious estimate or guess in which all elements of judgment are missing”; they were clearly not “wholly unreasonable”.

Given that we have concluded that the assessments were made to best judgement, the burden of proof shifts to Mr Akhtar to show that the amounts assessed were incorrect.

No witness evidence was provided by Mr Akhtar and, indeed, it appears he kept very little evidence in the form of sales records. It was not disputed that the sales figures in his VAT returns were calculated from purchases, not from sales records. The evidence we have considered is therefore the limited documentary evidence in the bundle.

Mr Smith sought, in the hearing, to give evidence as to the profit margins earned by other businesses and the way in which they operate, from his perspective as accountant to such businesses. We considered that this was an attempt to provide expert evidence which had not been directed by the Tribunal. In the circumstances, we did not consider that it was appropriate to take into account such evidence.

We set out below the various arguments made on behalf of Mr Akhtar as to why the assessments should be reduced to nil.

We have already discussed this above: the shop takings were not apparently affected by COVID as the amounts declared in the VAT returns remained consistent throughout 2020 (and, indeed, increased each quarter during that year) and remained similar throughout 2021. It would appear that COVID restrictions did not affect the business. As noted above, if there had been any effect on sales, the methodology of applying an uplift to declared takings would have reflected that effect.

The restricted opening hours also do not mean that the quantum assessed must be incorrect; the assessments were based on the sales till readings and the uplift was applied consistently. If the limited opening hours had an effect on takings, that would be reflected in the calculation accordingly.

Therefore, to the extent that this argument was also directed towards quantum, we do not consider that any amendment for the effects of COVID is appropriate.

There was some discussion as to whether three significant amounts noted on three z-readings as over-rings (£1,100; £6,000 and £25,000) had been assessed. We consider that it was clear from correspondence and Officer Calderwood’s evidence that these amounts had not been included in the assessments and so do not consider that any adjustment needs to be made to the quantum for the over-ring amounts.

There was also some discussion of the impact of a day’s missing sales from 4 September 2022 where it was contended that the z-readings showed a difference of £1,202.58 which had been added to sales. Mr Smith contended that the z-readings for 3 September 2022 and 5 September 2022 showed the sales made between those two days were £778.35 and this was supported by an increase in totals between those two dates of £778.35. As such, no additional amount should have been added to account for the missing reading. However, he also stated in the hearing that the shop’s daily average sales were approximately £1,200-1,500.

The till reports provided to the panel did not include those for 3 September 2022 and 5 September 2022: we were provided only with reports for 7 July, 18 July 2022, 11 August 2022, 29 August 2022, 1 September 2022, 16 September 2022 and three other z-readings for which the dates are unclear. One appears to be either 8 or 9 July 2022, the other two appear to be 19 July and 15 September 2022. The reports provided do not consistently show running totals; they appear to have been provided to support the submissions made with regard to overrings. To the extent that running totals are shown, they reflect the daily average sales referred to by Mr Smith.

Given the lack of supporting evidence, we do not consider that Mr Akhtar has met the burden of proof on him to support the contention that there should be no assessment of an amount of £1,202.58 in sales for 4 September 2022.

It was contended for Mr Akhtar that the gross profit calculated by the assessments was excessive because, although groceries may have a mark-up of 20-30%, a large part of the business sales were cigarettes on which the margin was only 8%. The assessments indicated a gross profit of approximately 26-28%, with one period showing 31% and another showing 15%. It was contended that even larger stores could not achieve a gross profit in excess of 20%. In support of this, the bundle included a copy of Lidl UK’s comprehensive income statement which showed a gross profit of 21%.

We do not consider that this contention was made out; there was no documentary evidence in support of Mr Smith’s contentions as to the proportions of sales or the margins achieved (for the avoidance of doubt, we do not consider that the declared figures in the VAT returns are relevant evidence). We note that, despite his contention that a large store could not achieve a gross profit in excess of 20%, Mr Smith provided a document that showed that Lidl – which we take judicial note is well-known for being a very low-cost and low-margin store – achieved a gross profit in excess of 20%.

We do not consider that the evidence and contentions with regard to the gross profit margin satisfies the burden of proof on Mr Akhtar to displace any part of the quantum of the assessments.

The explanations for the no-sales shown in the till records were inconsistent; in correspondence it was noted (and not disputed) that Mr Akhtar had explained at the initial visit that these were due to the till jamming and stated that lottery scratch card sales were not put through the till. In correspondence and in a reply to HMRC’s Statement of Case, it was stated that the money for the scratch cards was put through the till but no sale was recorded because Mr Akhtar was only entitled to the commission on those cards. It was contended that the reason that most of the no-sales transactions occurred on a Sunday was because people mostly bought lottery scratch cards on a Sunday. No evidence for this was provided; the National Lottery invoices provided are weekly summaries which do not show on which days the cards are purchased. It was separately stated that some of the no-sales were also due to people waiting for a bus at the nearby stop seeking change.

The Tribunal bundle included an analysis of National Lottery invoices for 10 July 2022 to 3 September 2022 prepared by Mr Smith. The invoices were weekly summaries which appeared to be printed from a National Lottery machine. This analysis showed 1,396 transactions and noted that the number of no-sales which HMRC stated had taken place in the same period was 809. HMRC allowed 5 no-sales per day, so the number of otherwise unexplained no-sales in the same period was shown as 529 in the lottery card analysis prepared on behalf of Mr Akhtar.

Given this evidence, produced on behalf of Mr Akhtar, we do not consider that the lottery scratch card sales provide an explanation for the number of no-sales – there were, on this analysis, almost three times as many lottery scratch transactions as unexplained no-sales records.

It was further contended that the no-sales transactions also included bus passengers wanting change and, in the hearing, possibly mistakes made by Mr Akhtar’s daughter when working on a Sunday. Taken together with the analysis of lottery cards sales, the effect is that Mr Smith was contending that the number of unexplained no-sales (529) in the analysis was to be explained by in excess of 1,400 transactions.

That is simply not a logical or credible explanation. We consider it is far more likely that the no-sales represent sales which were not rung up correctly; we note that HMRC do not allege dishonesty or deliberate behaviour in respect of this. The belated information that Mr Akhtar’s daughter works on Sundays was not specifically put forward as suggesting that she made more mistakes than Mr Akhtar, but there seems little other reason for providing that explanation.

We therefore do not consider that the information provided to explain the no-sales records supports any adjustment to the quantum of the assessments.

For the reasons set out above, we do not consider that Mr Akhtar has satisfied the burden of proof on him to show that the quantum of the assessments should be displaced.

We therefore uphold the assessments in full.

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.