Whitfield
| Jurisdiction | UK Non-devolved |
| Judgment Date | 14 October 2016 |
| Neutral Citation | [2016] UKFTT 685 (TC) |
| Date | 14 October 2016 |
| Court | First-tier Tribunal (Tax Chamber) |
Judge John Brooks, John Coles
Mike Jones, of Mike Jones Ltd, appeared for the appellant
Jane Ashworth of HM Revenue and Customs, appeared for the respondents
Value added tax – Best judgment assessment – Café operated by appellant taxpayer – Whether correct apportionment between standard-rated and zero-rated sales – Primary task of tribunal to find correct amount of tax – Taxpayer's appeal allowed in part.
The First-tier Tribunal (FTT) partly allowed the appeal against HMRC's decision that the standard-rated sales at a café had been underdeclared.
Whitfield ran a café serving hot and cold food to eat in or take away. Whitfield appealed against a £20,239 assessment for underdeclared output tax for the accounting periods 09/10 to 06/14 (inclusive). Whitfield claimed that business had declined following the café having been rammed by a vehicle on several occasions. This not only resulted in the café being closed for repairs, but had led to fewer customers. Local competition, in particular a pub serving breakfast, had cut the sales of standard-rated food. Whitfield had standard-rated sales of crisps, drinks and hot food if consumed there. However, if customers ate cold food at the café, it was wrongly zero-rated. A jacket potato was standard-rated, but if it had a cold filling it was zero-rated.
HMRC pointed out that such treatment was incorrect, because all food and drink consumed on the premises should be standard-rated. Thus, invigilations of sales were undertaken by HMRC officers, who calculated that the average percentage of standard-rated sales was 47%. The average percentage as recorded by Whitfield was only 29%. HMRC took an average of these two figures, i.e. 38%, as the basis for assessing the underdeclared VAT.
Whitfield contended that the FTT should prefer the figures that she had recorded in March 2015, as these covered a longer period than those used by HMRC in the assessment. However, given the evidence of a decline in standard-rated sales since the period assessed, the FTT did not consider that much assistance could be gained from these figures, which were compiled almost a year after the assessment period.
The FTT was concerned by HMRC's approach in taking an average of the percentage of the two-day invigilation and an average of the six-day percentages as recorded by Whitfield and then using a simple average of the two average percentages to reach a conclusion. The average percentages of the two-day invigilation would be accurate only if the turnover was the same for each day, which it was not. The simple average percentage over six days would be accurate only with the same turnover on each day.
On the first day of the invigilation, 28 August 2014, the turnover was £139.10 of which £58.90 was standard-rated. The turnover for the second day, 2 September 2014, was £200.50 of which £105.20 was standard-rated. Therefore, over these two days standard-rated sales accounted for 48% of the turnover. If standard-rated sales are taken to be 48% of turnover on each of HMRC's two days invigilation and then taking an average of the whole eight days which, rounded down, is 34% (i.e. 48 + 48 + 38 + 18 + 25 + 25 + 49 + 24 = 275/8 = 34.37) and if this percentage is applied in making the assessment, the output tax under declared by Whitfield was only £17,481. Thus, the FTT allowed the appeal in part and cut the assessment accordingly.
Under the current law, sales of food eaten on the premises, whether hot or cold, is standard-rated. However, cold food, which is taken away, is zero-rated. It was accepted that there were errors in the VAT returns, because of zero-rating sales that should have been standard-rated. The primary task of the FTT was to determine the correct amount of VAT.
[1] Mrs Joyce Whitfield appeals against an assessment to VAT, in respect of under declared output tax for the VAT accounting periods 09/10 to 06/14 (inclusive), in the sum of £20,239 issued by HM Revenue and Customs (“HMRC”). Although she was notified of the assessment by letter dated 22 September 2014 the assessment was not in fact issued until 18 November 2014 and was upheld on 6 February 2015 following a review.
[2] The appeal first came on for hearing on 27 July 2016 at which an issue arose, on the application of Mr Mike Jones (who appears for Mrs Whitfield) as to whether documents, including the notebook of an officer (of HMRC) recording details of a visit to the café and on which the assessment under appeal is based should be admitted as evidence.
[3] Under directions issued by the Tribunal on 14 January 2016 the parties were to provide their lists of documents to each other on 26 February 2016. However, the disputed documents were sent to Mrs Whitfield's representative, Mike Jones Ltd, on 29 February 2016, three days late. Because of this, on receiving the letter Mr Jones opened the envelope, saw what the documents were but did not read them. Instead he returned them to HMRC “because they were late”. As these documents were highly relevant to the appeal, in the absence of any compelling reason otherwise, we decided that they should be admitted and directed accordingly. However, as it was necessary for Mr Jones to read them to be able to present Mrs Whitfield's case we granted an adjournment to enable him to do so.
[4] In granting the adjournment we had regard to the overriding objective of the Tribunal Procedure (First-tier Tribunal)(Tax Chamber) Rules 2009 (the “Procedure Rules”), to deal with case fairly and justly. In doing so we noted that under rule 2(4) the parties have an obligation to help the Tribunal to further the overriding objective and that rule 2(2) explains that dealing with a case “fairly and justly” includes dealing with the case in ways which are proportionate to the importance of the case and avoiding unnecessary formality and seeking flexibility in the proceedings.
[5] We did not consider it to be proportionate to open an envelope, see what it contains and return it to the sender unread just because it was a few days late. Such action is hardly flexible and does not avoid unnecessary formality. In the circumstances, as the adjournment would not have been necessary had Mr Jones taken a different approach, we considered it appropriate that he should pay HMRC's wasted costs of the adjourned hearing. We therefore directed HMRC to produce a schedule of these costs and that Mr Jones be given an opportunity at the commencement of the re-listed hearing to make representations as to why he should not be ordered to pay HMRC's wasted costs.
[6] However, Mrs Jane Ashworth, for HMRC, explained that, despite the direction, because of a lack of time and in view of the small amount of costs involved a schedule was not prepared. In the circumstances we did not seek submissions from Mr Jones or make any wasted costs direction.
[7] In addition to a bundle of documents, including those admitted following the application at the adjourned hearing we heard from Mr Matthew Mantle, the HMRC officer who visited Mrs Whitfield's business and who made the assessment under appeal. He was cross-examined by Mr Jones. We also heard from Mrs Whitfield who was cross-examined by Ms Ashworth. It is on the basis of this evidence that we find the following facts.
[8] Mrs Whitfield runs a café, The Village Munchbox in Rumney, Cardiff, serving hot and cold food to eat in and take away from Monday to Friday between 08:00 and 14:30. There are seven tables in the café, three of which are lower coffee tables which Mrs Whitfield explained would not be suitable for eating at. There is also a breakfast bar with stools although we were told that due to lack of space in the premises these could not be used at the same time as the tables. Mrs Whitfield said business had suffered following the front of the café having been rammed by a vehicle on several occasions. This not only resulted in the business being closed for a period for repairs to be undertaken but had led to fewer customers. She explained that the busiest periods for the café were in the run up to Christmas and its quietest times were in the summer months. Also, because of local competition, in particular a nearby pub serving breakfast, sales of standard rated food had been in decline.
[9] On 28 August 2014 Mr Mantle and another HMRC officer, Tracy Mackenzie, visited the café. They were told by Mrs Whitfield that she charged VAT at the standard rate on crisps, drinks and hot food consumed there but that if customers ate cold food at the café she treated it as being zero-rated. She also said that a jacket potato would be charged at a standard rate but if it had a cold filling that would be zero-rated. Mr Mantle explained that such treatment was incorrect and that all food and drink consumed on the premises should be standard rated.
[10] An invigilation of sales...
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