WH Smith Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 13 December 1999 |
| Date | 13 December 1999 |
| Court | Value Added Tax Tribunal |
VAT Tribunal
The following cases were referred to in the decision:
Argosy Co Ltd v IR Commrs WLR[1971] 1 WLR 514
Associated Provincial Picture Houses Ltd v Wednesbury CorpELR[1948] 1 KB 223
Gauntlett VAT[1996] V & DR 138; [1996] BVC 2702
Georgiou (t/a Marios Chippery) v C & E Commrs VAT[1996] BVC 236
Holder v C & E Commrs VAT(1989) 4 BVC 68
Mahon v Air New Zealand Ltd ELR[1984] AC 808
R v Criminal Injuries Board, ex parte A WLR[1999] 2 WLR 974
R v Independent Television Commission, ex parte TSW Broadcasting Ltd[1996] EMLR 291
Rahman (t/a Khayam Restaurant) v C & E Commrs VAT[1998] BVC 323
Schlumberger Inland Services Inc v C & E Commrs VAT(1986) 2 BVC 200,276
Van Boeckel v C & E Commrs VAT(1980) 1 BVC 378
Assessment - Whether made to best judgment - Retailer - Output tax - Daily gross takings - "Pre-till" theft of cash by employees who did not record sales - Transactions recorded at electronic point of sale with cash extracted and discrepancies explained as incorrect change or refunds - Assessment based on survey of retailers and on some targeted surveillance - Methodology criticised by appellant as being arbitrary and unreasonable - Whether assessment invalid as not being made to best judgment - Value Added Tax Act 1994 section 73 subsec-or-para (1)Value Added Tax Act 1994, s. 73(1).
The issue was whether an assessment made to take account of theft of cash by staff, but not based on precise factual information, was invalid as not having been made to best judgment.
At the material time, the appellant was the representative member of a VAT group which included WH Smith Retail Ltd and Waterstones Ltd, which had adopted Retail Scheme J, and Virgin Retail Ltd and Our Price Ltd, which operated Retail Scheme F.
In September 1996 M, a senior Customs officer, visited the appellant's Group Head Office for four days. He subsequently wrote to the appellant expressing concern at the increase in stock deficiencies for the year to 1 June 1996 over the previous two years. His conclusion was that a substantial proportion of the deficiency had been caused by the theft of cash by employees before it had reached the till and without the goods having been scanned at the checkout point. He requested the appellant to provide information concerning the numbers of staff involved in the theft of cash and goods. A meeting took place, the purpose of which was to explain in detail the seriousness with which the appellant took the issue of stock shrinkage. At the meeting, a substantial amount of documentary material was made available to Customs, including schedules of stock deficiencies, test purchasing results, results of covert surveillance operations, the Security Controller's Report for the year ended 31 May 1995 and the British Retail Consortium's Retail ("BRC") Crime Costs Survey 1995/96. In the course of the meeting, the appellant emphasised the near impossibility of obtaining data on unrecorded sales and explained that it did not carry out test purchases as a benchmark for unrecorded sales but only in cases where an employee was suspected of theft. M proceeded to estimate the amount of unrecorded sales represented by staff theft, using for his calculations the material supplied at the presentation, in particular the report of the covert surveillance operations carried out in 1995 and 1996, and arriving at a proportion of 32 per cent of overall stock deficiencies as being attributable to staff theft which was then apportioned between stock and cash. He presented the figures to the appellant as being the basis of a future assessment. The appellant responded by pointing out that the 32 per cent figure for staff theft was a BRC figure not the appellant's and that the covert surveillance results were not representative, having been targeted. On 30 April 1997, M telephoned the appellant's security department and asked to inspect the records relating to test purchases. This was refused on the grounds that the records contained confidential information on staff and that any visit would involve substantial management and security department time. The appellant submitted that potential underrecorded sales were insignificant and could not be fairly and reasonably calculated, pointing out that a Retail scheme did not set out to calculate the exact amount of VAT due on supplies made by a retailer within a given period. Assessments were made and subsequently withdrawn as either being out of time or not made to best judgment, but they were later replaced by further assessments which were substantially lower, taking into account representations made by the appellant concerning the methodology adopted and the percentage of deficiencies attributable to staff theft. The company appealed. It was agreed between the parties that the issue would be confined to that of best judgment, any argument as to quantum being reserved for a future hearing in the event that it became necessary.
The appellant contended that it was not enough for the commissioners to say that there must have been unrecorded sales, since without any neglect or default by the appellant there was no material on which to make a proper calculation. Customs had erroneously taken the appellant's figures for total stock deficiencies and had included non-crime elements in order to calculate the staff theft percentage. Further, they had used the BRC survey figures and not the appellant's in making their calculations. The method adopted to apportion staff losses between stock and cash theft was also flawed. The sample used for the assessment had been too small to be valid.
The commissioners contended that it was important to distinguish between the requirement for best judgment and the Wednesbury test of reasonableness applicable to judicial review proceedings. Provided an assessment was to best judgment the tribunal could substitute its own view and the mere fact of mistakes in an assessment did not negate best judgment, provided that it was made in good faith. It was clear that there were unrecorded sales and it would be absurd if there could be no assessment. While it was true that the percentage of staff theft was small the overall figures w ere high. It was not good enough to say that it was impossible to identify the unrecorded sales without attempting to determine the level of such sales. It was accepted that the original figures of 32 per cent and 27 per cent should be adjusted to take account of non-crime costs. While the tribunal could interfere to adjust the amount of the assessments, the assessments themselves had been made to best judgment.
Held, dismissing the company's appeal:
1. The real issue was whether the assessments were "wholly unreasonable" and that was primarily a question of fact rather than of the law. The strict application of public law principles at the best judgment stage would often result in an assessment being quashed, when in common sense it should be adjusted.
2. Customs had been entitled to do their best with the material which they had. If the appellant was correct, having been refused access to their records Customs would have been obliged to drop the matter, despite believing that considerable VAT was involved.
3. This was an important test case, and in order that a consistent approach be taken to all retailers the issue of staff theft should be dealt with in the commissioners' publications on the retail schemes.
[The tribunal set out the facts summarised above and continued as follows.]
79. Mr Prosser [for the appellant] accepted at the outset that VAT is payable in respect of any standard-rated sales notwithstanding that the proceeds may have been stolen.
80. He said that nothing turned on the wording of either Scheme J, which applied to Retail and Waterstones, or Scheme F, which applied to Virgin Retail and Our Price. He accepted that notice 727Notice 727 requires retailers to include all sales proceeds in daily gross takings.
81. He said that the issue here was whether the appellant should have included an adjustment to its recorded sales for (1) unrecorded sales where a member of staff dishonestly failed to record the sale and stole the proceeds or (2) fraudulent refunds of cash. The commissioners said that these must have taken place undetected and an adjustment must be made. Mr Prosser accepted that an adjustment was needed provided there was proper material with probative value. He said that without any neglect or default by the appellant, there was no material on which to make a proper calculation in these cases.
82. Mr Prosser said that no assessment should be made unless best judgment was possible. The commissioners needed to have some material...
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Dockett
...as it answers (see the comments of Neill LJ in C & E Commrs v John Dee LtdVAT[1995] BVC 361; and of the Tribunal in WH Smith LtdVAT[2000] BVC 2237 para 124). Another phrase (used by Woolf J in Van Boeckel) referred to the obligation of the commissioners "fairly (to) consider all material pl......
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Rahman t/a Khayam Restaurant
...(t/a Khayam Restaurant) v C & E CommrsVAT[1998] BVC 323 Van Boeckel v C & E Commrs VAT(1980) 1 BVC 378 WH Smith Ltd VATNo. 16,505; [2000] BVC 2237 Assessment - Best judgment - Rehearing of appeal - Observations on the role of the tribunal in the light of judgments of the High Court. This ap......