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You are here: BAILII >> Databases >> First-tier Tribunal (Tax) >> Golden Cube Ltd v Revenue & Customs (VAT - ASSESSMENTS : Other) [2018] UKFTT 488 (TC) (20 August 2018) URL: https://www.bailii.org/uk/cases/UKFTT/TC/2018/TC06666.html Cite as: [2018] UKFTT 488 (TC) |
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TC06666
Appeal number: TC/2016/05440
VALUE
ADDED TAX – restaurant – split between
standard-rated and zero-rated supplies – whether output tax understated –
appeal allowed
FIRST-TIER TRIBUNAL
TAX CHAMBER
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GOLDEN CUBE LIMITED |
Appellant |
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- and - |
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THE COMMISSIONERS FOR HER MAJESTY’S |
Respondents |
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REVENUE & CUSTOMS |
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TRIBUNAL: |
JUDGE JONATHAN CANNAN
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Sitting in public at North Tyneside Magistrates Court on 12 June 2018
Mr Alan Watson of Watson Associates, Accountants appeared for the Appellant
Mr Gareth Hilton of HM Revenue & Customs appeared for the Respondents
© CROWN COPYRIGHT 2018
DECISION
Background
1.
The appellant trades as a franchisee of Subway from shop premises
in South Shields. This appeal concerns an assessment to Value
Added Tax dated
20 April 2016 in the sum of £47,875 covering periods 05/12 to 01/15 (“the
Assessment”). The Assessment was made following an enquiry by HMRC in which the
officer conducting the enquiry concluded that the Appellant had been
incorrectly zero-rating certain supplies which ought to have been
standard-rated.
2. HMRC also raised a separate assessment dated 16 May 2016 in the sum of £14,042 which comprised under declared output tax on reverse charge supplies made by the appellant for periods 11/14 and 02/15 and disallowed input tax for periods 05/12 to 11/15. There was no appeal against the sum assessed for output tax on reverse charge supplies. In the light of further material provided by the appellant shortly prior to the hearing HMRC agreed that the assessment to input tax should be set aside. In the circumstances this appeal is solely concerned with the Assessment.
3.
In the course of opening, Mr Alan Watson who appeared for the
appellant acknowledged that he was not challenging whether the Assessment had
been made to best judgement. I bear in mind the guidance given by the Court of
Appeal in Customs & Excise Commissioners v
Pegasus Birds
Ltd
[2004] EWCA Civ 1015 where at [38] Carnwarth LJ as he then was stated as follows:
“ 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.”
4. In the light of Pegasus Birds, the principal issue on the appeal therefore is whether the Assessment is excessive. The burden is on the appellant to satisfy me on the balance of probabilities that the Assessment is excessive. The appellant contends that standard-rated and zero-rated supplies have been properly identified and output tax correctly accounted for. Mr Watson submits that the Assessment should therefore be reduced to nil. Mr Gareth Hilton who appears for the Respondents seeks to maintain the Assessment.
5. I heard evidence on behalf of the Appellant from Mr Stephen Wood, a director and shareholder in the appellant; Ms Kay Tiffin and Ms Sarah Duke, both employees of the appellant; and from Mr Watson, the appellant’s accountant. On behalf of HMRC I heard evidence from Mr Darren Jordan, the officer of HMRC who conducted the enquiry and made the Assessment. All witnesses provided witness statements and gave oral evidence. On the basis of that evidence and the documentary evidence before me I make the following findings of fact, all by reference to the balance of probabilities.
Findings of Fact
6.
The appellant’s shop is located in a back lane some 50 yards off
a main street in South Shields. It is next door to a loading bay operated by Argos
and has no
view
as such. It is open Monday to Saturday, 7am to 8pm and on
Sunday, 10am to 6pm. The menu principally offers hot and cold sandwiches known
as “subs” and salads. There is only one hot filling, which is meatballs.
However any sandwich may be toasted at the customer’s option using a toaster
oven. Customers at the shop include lunchtime office workers, shoppers and
children.
7.
The appellant has been registered for VAT
since 2011. Mr Jordan first
visited
the appellant on 11 August 2015. He met with Mr Wood and Ms Parry, who
was then the shop manager. He explained to them that the proportion of
standard-rated to zero-rated sales was lower than he would have expected. It
was agreed that Mr Jordan would carry out an invigilation exercise. The
invigilation exercise involved two officers attending the shop premises to
observe the operation of the till and to record details of individual sales
transactions.
8.
Invigilations took place on 12, 15 and 21 October 2015 which were
a Monday, a Thursday and a Wednesday respectively. Mr Jordan
was present on each date together with another officer. The officers observed
all sales on each day during the period of each invigilation, which was 10.20am
to 2.50pm on 12 October, 10.30am to 2.50pm on 15 October and 10.35am to 3.05pm
on 21 October. The times were chosen by Mr Jordan so as to cover the busy
lunchtime trade. On 21 October 2015 the till system
stopped working at
approximately 12 noon and staff recorded sales manually, categorising sales
between eat in/eat out and between hot/cold food.
9.
The shop staff provided copies of individual till receipts to Mr Jordan
for all sales during the period of each invigilation. Mr Jordan
was satisfied and I find that during the period of each invigilation all sales
were correctly entered into the till and for all of those sales the correct VAT
liability was applied. In broad terms standard rated sales comprised food
consumed on the premises and hot takeaway food, and zero rated sales comprised
cold takeaway food. For the period when the till was not working all sales were
correctly categorised by the staff.
10. Mr Jordan analysed the results from the three invigilations as follows:
Date |
Total Gross Sales £ |
SR Sales
£ |
ZR Sales
£ |
Proportion SR Sales % |
Proportion ZR Sales % |
|
|
|
|
|
|
12 Oct 2015 |
538.82 |
456.98 |
81.84 |
84.81 |
15.19 |
15 Oct 2015 |
531.75 |
434.79 |
96.96 |
81.77 |
18.23 |
21 Oct 2015 |
626.47 |
500.91 |
125.56 |
79.96 |
20.04 |
|
|
|
|
|
|
Total: |
1,697.04 |
1,392.68 |
304.36 |
|
|
11.
Mr Jordan identified that the proportion of standard rated sales
during the invigilation exercise was much higher than the proportion shown by
the appellant’s VAT
returns for previous periods. The average proportion of
standard-rated sales (including
VAT)
to gross sales over the 3 days of
invigilation was 82%. The gross sales and the proportion of standard-rated
sales (including
VAT)
to gross sales for
VAT
periods 05/12 to 11/15 were as
follows:
Period |
Gross Sales £ |
SR Sales £ |
Proportion SR Sales % |
Period |
Gross Sales £ |
SR Sales £ |
Proportion SR Sales % |
|
|
|
|
|
|
|
|
05/12 |
60,025 |
33,930 |
57 |
05/14 |
67,902 |
36,894 |
54 |
08/12 |
65,226 |
30,624 |
47 |
08/14 |
82,006 |
42,084 |
51 |
11/12 |
70,226 |
39,378 |
56 |
11/14 |
68,173 |
44,526 |
65 |
02/13 |
70,425 |
34,506 |
49 |
02/15 |
71,733 |
45,774 |
64 |
05/13 |
68,420 |
33,438 |
49 |
05/15 |
64,035 |
39,600 |
62 |
08/13 |
74,008 |
32,460 |
44 |
08/15 |
74,278 |
44,628 |
60 |
11/13 |
69,918 |
32,148 |
46 |
11/15 |
75,556 |
54,240 |
72 |
02/14 |
69,482 |
30,714 |
44 |
|
|
|
|
12.
When the appellant first registered for VAT
its first
VAT
return
for period 08/11 showed 79% standard rated sales, period 11/11 showed 71% and
period 02/12 showed 54%. These figures were provided by Mr Jordan
and I accept them. He acknowledged however that unlike the figures above they
represented the proportion of standard-rated sales (excluding
VAT)
to total
sales net of
VAT.
13.
Following the invigilation exercise there was a meeting at which
Mr Jordan gave an overview of his findings. Mr Wood expressed concern as to
whether the invigilation exercise was representative. In particular, he was
concerned that there were only three visits
and each
visit
lasted only until
mid-afternoon. Mr Jordan offered to carry out further invigilations but at that
stage Mr Watson wanted to review Mr Jordan’s findings. Mr Jordan
left details of the invigilation exercise and Mr Watson intended to respond by
the middle of January 2016.
14.
In the absence of any response, Mr Jordan wrote to the Appellant
on 10 February 2016 enclosing preliminary calculations showing that additional
VAT
of £47,874 would be due if the average proportion of standard rated sales
of 82% shown by the invigilation exercise were applied to the appellant’s
turnover for
VAT
periods 05/12 to 11/15. The appellant was given an opportunity
to provide comments or additional information. Mr Jordan also stated that he
was happy to undertake further invigilations if the appellant did not consider
the results were representative.
15. There was no response by the appellant to that letter, but it appears a letter from Mr Watson crossed with it in the post. Mr Watson wrote by letter dated 8 February 2016. Mr Watson took issue with a computational aspect of the invigilation figures left by Mr Jordan. Mr Jordan replied on 3 March 2016 in a letter to the appellant, maintaining his method of calculation. Mr Jordan again offered the opportunity for further invigilations.
16.
There was no response to Mr Jordan’s letter. In his evidence Mr
Watson stated that he had not accepted the offers of further invigilations
because at the time those offers were made the amount of VAT
being sought by
HMRC had not been quantified. He said that if the sum sought had been modest,
the appellant may have taken a commercial
view
not to challenge the calculation.
In fact, it is clear that by the time of the second offer of further
invigilations made on 10 February 2016 the amount of
VAT
had been quantified.
Unfortunately, however there was a breakdown in communication between Mr Wood
and Mr Watson. Mr Jordan’s correspondence was being sent to Mr Wood and it was
not being copied to Mr Watson or forwarded to him.
17.
On 29 March 2016 Mr Jordan issued a notice of assessment to the
appellant. I understand that a computer generated notice of assessment was also
sent on 20 April 2016. The Assessment was made pursuant to section 73(1) Value
Added Tax Act 1994. A copy was sent to Mr Watson and again it appears to have
crossed with a letter from Mr Watson to Mr Jordan dated 23 March 2016 in which
Mr Watson effectively argued that as the till was operated correctly during the
invigilations, the
VAT
returns must be accurate. In a response dated 15 April
2016, Mr Jordan maintained that standard-rated sales had not been entered into
the till correctly at other times.
18. On 16 May 2016 Mr Watson wrote suggesting that the invigilation exercise was not representative because it did not cover evening trade or weekends, and it was at a colder time of year when more customers might order hot food. He invited Mr Jordan to carry out two further invigilations. However, at this stage Mr Jordan appears to have considered that as the Assessment had been made, it was not appropriate to carry out further invigilations. In the event the appellant sought a review of the Assessment and the Assessment was confirmed in a review dated 12 September 2016 without any further invigilations taking place.
19. On this appeal, the appellant challenges the Assessment broadly on the basis that the invigilations are not representative because they were carried out at the same time of day and year and they did not include weekends and evenings. Further, the Assessment did not take into account periods when the appellant’s toasting machine was broken so that hot food could not be sold. The appellant also contends that the invigilations at least show that sales are entered into the till correctly, there is no evidence to suggest that sales have been deliberately entered incorrectly and there is no evidence to support any errors in the operation of the till.
20.
I now turn to consider how the shop, and in particular the till
was operated. Mr Wood does not work in the shop on a day to day basis. The
appellant employs staff and supervisors to work in the shop, although Mr Wood
does call in once or twice a week. On those visits
he will meet with one of
the supervisors, pay any outstanding bills and sort out any problems. He does
not serve customers whilst he is there.
21. The witness statements of Ms Duke and Ms Tiffin were identical. They were drafted by Mr Wood and Mr Watson. It would have been better if those witnesses had been invited to make witness statements using their own words. However, their oral evidence in chief and under cross-examination gave them an opportunity to give their evidence in their own words.
22. I am satisfied that all witnesses gave honest and, subject to one point below, reliable evidence. Subject to that point I accept the evidence of Mr Wood, Ms Tiffin and Ms Duke.
23.
Ms Tiffin has been employed as a supervisor at the shop since
2010. Her role involves managing stock and organising and supervising staff.
She also trains junior employees, including till training which takes place
during quieter periods. She was not aware of the difference in VAT
treatment of
difference types of sales. She had never been instructed to ring sales into the
till incorrectly and had never instructed any member of staff to do so. She
stated that the sales mix between hot and cold food and between eat in and
takeaway could differ wildly depending on the day of the week, time of day and
season. She was unable to identify any relevant pattern to the sales. She
acknowledged that sandwich orders may be entered incorrectly in to the till,
but maintained that such errors would be minimal.
24.
Ms Tiffin stated in her witness statement that there were “many
times” when the shop equipment was out of order, including the toasting oven so
that toasted sandwiches could not be sold. In her oral evidence she clarified
that whilst the toasting oven had been out of order, it was not a frequent
occurrence, maybe 4 or 5 times for one or two days before it was repaired.
Eventually a new toasting oven was purchased in 2015 and the shop was without a
toasting oven for a week before the new toasting oven arrived. Customers were
very
understanding, and if necessary their sandwiches would be heated in the
microwave, although this did not give a good result.
25.
Ms Duke has also been employed as a supervisor at the shop since
2010, in the same role as Ms Tiffin. She too was not aware of the difference in
VAT
treatment of difference types of sales. She had never been instructed to
ring sales into the till incorrectly and had never instructed a member of staff
to do so. She also stated that the sales mix could differ wildly depending on
the day of the week, time of day and season.
26.
Mr Wood’s evidence in his witness statement was that there were
“many times” when the shop’s toasting machine was out of order so that hot
sandwiches could not be sold. The evidence of Ms Tiffin and Ms Duke in their
witness statements was to the same effect. I do not regard that evidence as
reliable and each witness in oral evidence described the toaster oven as
breaking down “occasionally” or words to that effect. I accept that the toaster
oven did break down on occasion, but the occasions were not very
frequent and
would not have had a significant effect on the ratio of standard rated sales to
total sales.
27.
The till operated by the appellant is programmed by Subway and
linked to Subway’s systems
electronically. Mr Wood has not made any adjustments
to the till or to its software. The evidence included a “Weekly Inventory and
Sales Report” for 17 October 2017. These weekly till reports are generated by
the till and retained by the appellant. Mr Watson prepares the
VAT
returns for
the appellant and has been engaged to do so since about 2014. He is supplied
with the weekly till reports for that purpose. Mr Watson does not perform any
checks on the information provided in the weekly till reports.
28.
The till has a touch screen and uses images to prompt the operator
to enter details of the customers’ choice of sandwich roll, fillings and
extras. It also prompts whether the sandwich is hot or cold and whether the
customer wants to eat in or takeaway. The till is programmed to identify the
applicable VAT
rate to each transaction depending on the information entered.
The supervisors employed by the appellant are trained to use the till by
Subway. The supervisors themselves train other employees.
29.
The weekly till report is printed out on Tuesday night each week
by a supervisor. The figures are submitted to Subway electronically by the till
on Wednesday morning each week, although Subway can monitor information stored
in the till at any time. Mr Wood sends a hard copy of the weekly till report to
Mr Watson. The weekly till report shows the gross sales in each week,
calculates the VAT
output tax on supplies and shows the net sales. There is a
breakdown of the daily sales. The weekly till report also shows royalties and
other sums payable to Subway under the franchise agreement. Effectively, a sum
of 12.5% of sales net of
VAT
is payable to Subway.
30. The weekly till report also shows opening stock, usage and closing stock of each type of ingredient used in the shop.
31.
HMRC do not assert any positive case as to why the standard-rated
sales might be understated and it is not necessary for them to do so. In my
view
and in the circumstances of this case it is helpful to consider in broad
terms what reasons there might be for the invigilations to show 82% standard
rated sales whereas previous
VAT
returns show 44% - 65% standard rated sales.
32.
Mr Hilton for HMRC accepted that there may be three reasons for
differences in the proportions of standard-rated sales between the invigilation
days and the previous VAT
returns:
(1) Deliberate manipulation of the records.
(2)
Mistakes in the recording of standard rated sales, either in the till
entries, in the till programming or in the transfer of figures from the till
records to the VAT
returns.
(3)
The three days of invigilation are not representative of the previous
VAT
periods.
33. HMRC do not assert that the records have been deliberately manipulated. Quite rightly, because there is no evidence to support such an assertion. I can go further. On the basis of the evidence before me I am satisfied that there has been no deliberate manipulation of the records.
34.
There is no suggestion that the till was incorrectly programmed
and Mr Jordan accepted that the VAT
returns were consistent with the weekly
till reports. Obviously errors can occur in making till entries, but the nature
of the till with a touchscreen using images to prompt entries means that such
errors are likely to be minimal, and would not explain the results of the
invigilation. It is notable that on the invigilation days no errors were made.
The invigilations took place at the busiest time of day when one might expect
mistakes to be made. It may be that the till operators were more careful when
the invigilation was taking place. However, when they are given an option
between hot or cold, and between eat in or takeaway it seems unlikely that
there would be frequent and consistent errors one way or the other. The
evidence did not suggest that the till had any default setting which might have
led to errors giving rise to a disproportionate
value
of standard-rated sales.
35.
That leaves the possibility that the periods of invigilation were
not representative of the appellant’s trade over the previous VAT
periods. I am
satisfied that the appellant’s trade may be subject to daily
variations,
variations
arising from the time of day and/or seasonal
variations.
I
acknowledge that the appellant has not carried out any exercise to demonstrate
what the effect of such
variations
might be. Having said that, I must consider
whether or not I can be satisfied on the basis of the evidence before me that
the invigilation results are explicable by reference to such
variations.
36.
Mr Jordan suggested in his oral evidence that such variations
were unlikely to explain the differing proportions of standard-rated sales. He
relied upon his experience of other Subway shops in Newcastle, Darlington and
Consett. There was no direct evidence before me as to the trade of other Subway
shops. In the circumstances it would not be fair for me to accept Mr Jordan’s
evidence as to the proportion of standard-rated sales at Subway shops in other
locations at face
value.
37. I note that the proportion of standard-rated sales in period 11/15 was 72% and was somewhat higher than the previous periods. This was the period in which the invigilations took place. Mr Jordan also told me that periods after 11/15 were much lower than 82% but there were no documents to enable that evidence to be tested. I am not satisfied that there is any trend in the proportion of standard rated sales over the period of the Assessment that helps to explain the invigilation results.
38.
Taking into account all the evidence and my findings based on
that evidence, on balance I am satisfied that the most likely explanation for
the different proportions of standard-rated sales is that the invigilations
were not representative of the VAT periods to which they were compared. I
cannot say precisely why that should be the case. It may be because the
invigilations were all carried out during lunchtime over 3 days at the same
time of year and over a short period of time. I do not criticise Mr Jordan for
his choice of sample days and for his decision to concentrate on the lunchtime
trade. However, with the benefit of hearing all the evidence I must conclude
that it was not representative.
Conclusion
39. For the reasons given above I am satisfied that Assessment is excessive and that there was no understatement of standard-rated sales by the Appellant in the periods assessed. In the circumstances I allow the appeal.
40. 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.