[2011] UKFTT 142 (TC)

TC01016

	Appeal number TC/10/01109

VAT – Apportionment under s 19 of the Value Added Tax Act 1994 – appeal upheld.

FIRST-TIER TRIBUNAL

VAT 

	GARDINERS OF DENNY
YUILLS OF LANARK
FACEWEAR, KIRKINTILLOCH
			Appellants

	- and -
	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

TRIBUNAL JUDGE: JOHN M BARTON, WS
    (Member):	R L H CRAWFORD,  BA., CA., CTA

Sitting in public in George House, 126 George Street, Edinburgh on Monday 10 January 2011

Nicholas J Scullion, for the Appellants

Bernard Haley, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2011

DECISION

1.	The Tribunal upholds the appeal by Derek Doris and Yuills of Lanark (hereinafter referred to as “the Appellants”) against two VAT assessments of £7,538 and £15,795 issued by Her Majesty’s Revenue and Customs (“HMRC”) on 15 February 2010 in regard to the partial exemption method which should be used in optometrists’ businesses.
2.	In advance of the formal assessments, the Appellants lodged an appeal on 23 December 2009, and the Appeal was set down for hearing on 10 January 2011.
3.	Prior to the Hearing, HMRC lodged a file of productions containing the original VAT registration applications, a form containing voluntary disclosure of errors (VAT 652), correspondence between Peter Deans CA and HMRC with relative papers, and notes of visit and meetings.  The Appellants lodged a receipt with an example of a purchase from Specsavers.
4.	For the Appellants, Mr Scullion led the evidence of Derek Doris, Peter Deans CA and Graeme Deans CA; and for HMRC, Mr Haley led the evidence of William O’Pray, an HMRC officer based in Cotton House, Glasgow.
Evidence
5.	Mr Doris narrated the progression in acquiring the three optician outlets at Denny, Lanark and Kirkintilloch.  He observed that Denny was a small town with much unemployment.  Gardiners’ business had a range of patients, requiring much “hands on” by the ophthalmic optician in order to maintain the business, in contrast to any larger practice where dispensing is carried out by dispensing opticians and supervised staff.  Lanark had an older population, more community based, but the practice of Yuills had to compete with the large multiple opticians.  The business conducted from Kirkintilloch (Facewear) was similar to Gardiners and Yuills and it was for this reason that he had continued the 60%/40% apportionment which had been inherited and adopted when he acquired the Denny and Lanark practices.  In submitting quarterly VAT returns, the “dispensing” and “supply of goods” had been apportioned on a cash basis, being the method recommended by his professional association.  He had not kept records on which a time based method might be calculated.  The 60%/40% apportionment was not questioned until after a visit by a VAT inspector, Ms Symons on 6 May 2009.  Mr Doris agreed to a trial for the month of June 2009, and he contended that the outcome of this trial supported the ongoing 60%/40% apportionment.  Mr Doris did not accept that his working time involved travelling between the respective outlets, as he travelled to a particular outlet each day.  Mr Doris also referred to a trial purchase from Specsavers and pointed to the particular receipt which showed an apportionment of 67% exempt and 33% standard rate.
6.	In cross examination, Mr Doris confirmed that his wife was not a qualified optician.  His wife worked 3½ days each week mainly in Lanark, she also supervised the staff and attended to the book-keeping, but it was the accountants, Peter Deans that made up the wages.  Mrs Doris would interview any new staff and Mr Doris would only make the final decision; he would also interview any professional staff.  The clinical assistants (otherwise referred to as support staff or supervised staff) helped with the dispensing and attended to reception.  Mr Doris regarded the assistance given in the selection of frames as part of the dispensing process.  In 2010 the Appellants went over to a wholly computerised “point of sale” system which they assert has brought out a proportion of 65% exempt and 35% taxable. 
7.	Mr Peter Deans and his business partner Graeme Deans set out the circumstances under which the 60%/40% apportionment had been adopted and demonstrated that the test carried out over the month of June 2009 had confirmed this division.
8.	Mr O’Pray, an HMRC officer, had considerable experience, particularly in dealing with opticians’ businesses.  He was consulted after Ms Symons had visited the Appellants’ premises on 6 May 2009.  It was his understanding that much of an optician’s time was taken up with testing.  In his opinion, a cost based apportionment for the Appellants’ business was flawed because of the distorting effect of sales, and he considered that a time based apportionment was preferable because it reflected the amount of time that the optician spent on dispensing spectacles.  He disagreed that 85% of the time of supervised staff being attributed to dispensing as these members of staff also had other duties; indeed he considered that even 70% was too high.  Mr O’Pray accepted the figures submitted on 30 August 2009, which showed that in the month of June 2009, Mr Doris had been engaged for 33.6% of his time in sight tests; and that in the same month, Ms Howie, the only other opthalmic optician employed by the Appellants, had been similarly engaged for 42% of her time.  Mr O’Pray’s concern was in apportioning the remainder of Mr Doris’ and Ms Howie’s time.  
Material facts
9.	Derek Doris qualified as an Ophthalmic Optician in 1979.  In 2004, after 25 years in employment, Mr Doris acquired an optometrist business - Gardiners of Denny, 42 Stirling Street, Denny, Stirlingshire.  Mr Doris took over the existing staff and the practice book, and did not change any aspect of the business.  The firm of Peter Deans CA had acted as accountants and had attended to the VAT returns for the previous owner of the business; and Mr Doris continued to employ Peter Deans.  Peter Deans informed Mr Doris that in submitting quarterly VAT returns, the “dispensing” and “supply of goods” had been apportioned on the basis of 60% exempt and 40% standard rate.  Mr Doris’ own VAT registration took effect from 1 August 2004 and Mr Doris continued with the same 60%/40% apportionment.
10.	In 2006, Mr Doris entered into partnership with his wife, Elaine Doris, to acquire the business of Yuills of Lanark, Optometrists, 42 South Vennel, Lanark.  The effective date for VAT registration for the partnership was 21 September 2006.  Peter Deans was also instructed to attend to the VAT returns for this practice.  It was ascertained that the previous owner of this business had regarded 100% of the income as exempt.  Mr Doris with advice from Peter Deans did not consider this was correct.  The new partnership adopted the same 60%/40% apportionment that was being applied to Gardiners of Denny.  
11.	Subsequently, the partnership of Mr and Mrs Doris established the separate business of Facewear, Optometrists, 67 Markland Drive, Kirkintilloch, but under the same VAT registration that applied to Yuills of Lanark; and the same 60%/40% apportionment was applied to this new business.
12.	Prior to May 2009, the apportionment of 60%/40% adopted by Mr Doris, trading as Gardiners of Denny and by Mr and Mrs Doris, trading as Yuills of Lanark and Facewear was not the subject of any comment by HMRC. 
13.	In March 2009, it became apparent that income from sight tests (which was VAT exempt) had been included in the Appellants’ standard rated income, and on 25 March 2009, Peter Deans submitted voluntary disclosure forms for both registrations.
14.	On 6 May 2009, Ms Symons, visited the Appellants’ business premises in order to verify the voluntary disclosures.  Following this visit, HMRC were concerned in regard to the 60%/40% apportionment adopted by the Appellants; and on 8 May 2009, HMRC wrote to Peter Deans 
………. I must request that as the nature of your client's business has now changed, as between the two registrations there are now three shops covered by the two ophthalmic opticians, that Mr. Doris carries out a review of the time spent on the various activities to correctly identify what proportion of the sales time relates to dispensing.
Please furnish me with this information after one month's trial starting from the date of receipt of this letter, and I will adjust the figures below accordingly.  This will require him to do a full cost apportionment : -
The number of spectacles dispensed in the period
The cost of purchase of bought-in frames
The cost of bought in frames
The direct costs relating to the provision of the dispensing of the spectacles such as salary, National Insurance, pension provision, vehicle costs, training, professional body subscriptions for services received, professional indemnity costs and recruitment costs.
This will enable us to complete the following calculation: -
Unit Cost of Goods
Unit Cost of Goods + Unit Cost of Services x Spectacles Income x The VAT Fraction = VAT due.
15.	Mr Deans replied on 5 August 2009 reporting on the trial which Mr Doris had carried out in the month of June 2009.  The accompanying schedules contained detailed calculations for the cost of staff and the cost of materials, and the outcome was as follows:

Gardiners of Denny
Average cost of goods                                                          £36.05
(average cost of frames + lenses + VAT)
Average cost of service                                                         £69.81
(Cost of staff £5,584.48 divided by 80 spectacles dispensed)
Total cost of supplying spectacles                                        £105.86
Taxable element       34.06%
Yuills of Lanark
Average cost of goods                                                          £51.44
(average cost of frames + lenses + VAT)
Average cost of service                                                         £98.08
(Cost of staff £5,296.16 divided by 54 spectacles dispensed)
Total cost of supplying spectacles                                        £149.52
Taxable element       34.40%
Facewear of Kirkintilloch
Average cost of goods                                                          £30.64
(average cost of frames + lenses + VAT)
Average cost of service                                                         £45.04
(Cost of staff £2,387.05 divided by 53 spectacles dispensed)
Total cost of supplying spectacles                                         £75.68
Taxable element       40.49%
Within each figure for the “cost of staff”, the cost of Mr Doris’ services had been divided between all three outlets, and the cost of Ms Howie’s services had been divided between Gardiners and Facewear.  In relation to Gardiners, 56.51% of the notional charge for Mr Doris’ and Ms Howie’s services had been attributed to dispensing, in relation to Yuills, 66.82% of the notional charge for Mr Doris’ services had been attributed to dispensing, and in relation to Facewear, 62.02% of the notional charge for Mr Doris’ and Ms Howie’s services had been attributed to dispensing.  Within the calculations, Mrs Doris’ services had been regarded as the same as other named members of staff; and 85% of the notional charge for these members of staff had been attributed to dispensing.  There was no calculation showing how the 56.51%, 66.82% & 62.02% had been computed; but within further schedules which accompanied Peter Deans’ letter of 30 August 2009, it was shown that in the month of June 2009, Mr Doris had worked 9,750 minutes of which 3,275 minutes (33.6%) of his time had been attributable to sight tests; and that in the same month, Ms Howie had worked 9,210 minutes of which 3,870 minutes (42%) of her time had been attributable to sight tests.  
16.	HMRC replied on 4 September 2009, observing 
It would appear that you have provided calculations based on revised percentages of time spent on dispensing services; unfortunately you have not provided me with a breakdown of how you arrived at the percentage of time allocated for the cost of the Ophthalmic Opticians - Mr Doris and Ms Howie.  I would be looking for a breakdown of the time spent in each shop and then a breakdown of the time spent on activities eg eye sight tests, dispensing, management duties, travelling timee etc.  As such, can you please forward this information asap.
I have reviewed your calculations, however, in view of the number of branches to manage and the travelling time between each of the shops, it would appear that your standard rated percentage is exceptionally low.  I also note that Mr Doris mentioned prior agreement of 40% with a previous visiting officer, however I cannot find any record of another VAT inspection to either of these businesses.  From 1/1/98 opticians were required to individually agree an apportionment method with the Department; however, there is no correspondence on file regarding this matter.
The trade generally accepts that on average it takes the same amount of time to conduct an eye sight as to dispense the spectacles/lens; therefore I feel a time based apportionment will be more accurate.  Obviously the dispensing element cannot take place until the prescription is completed.
I would also comment on the fact that you have allocated 85% of unqualified staff time to dispensing activities.  Once again this appears high given the fact that two of the shops operate with 3 staff and one operates with 2 staff presumably only one member of staff works on dispensing following an eyesight test?  It would also be reasonable to expect these staff to undertake other duties such a reception, clerical, general advice, sales promotion etc.  As such, I would appreciate it if you would provide me with details of how you arrived at this percentage?  As Mrs Doris is also a partner in Yuills, can you provide a breakdown of how her time is apportioned over the business activities?
There followed a full list of detailed queries.
17.	A meeting followed on 6 October 2009.  Following this meeting, HMRC wrote to Peter Deans on 20 October 2009
…………….we feel that a full cost apportionment calculation covering a full VAT quarter or financial year end would have provided a more accurate reflection of the businesses.
Dispensing cannot take place until the prescription and medical checks are completed.  The percentage of time spent by the ophthalmic on dispensing should be adjusted to reflect the time that they spend on other duties i.e. eye tests, contact lens dispensing, supervision, travel etc.  Activities such as bookkeeping/record maintenance contribute to the ophthalmic opticians percentage even if they do not take place during normal working hours.  It follows logically that no time based percentage can be more than 100%.
Further as previously notified under the terms of Notice 701/57 Health professionals, Section 3 specifies that care services performed by unqualified staff can only be treated as exempt when directly supervised by an ophthalmic optician.  Again this cannot be 85% of the staff's time, as presumably other duties such as reception, clerical, general advice, sales promotion etc., must be done at all three branches by those staff. 
18.	Peter Deans replied on 11 November 2009
I note your comments regarding the full cost apportionment method.  I would state however that we have only supplied information requested by your correspondence dated 8 May 2009 in which you required our client to provide information for the full cost apportionment method after one months trial.  It would seem that now the results of the trial have been established, you now wish to increase the period of the trial, at our clients time and expense, as you now disagree with the trial length.
It has also become apparent through your correspondence and with discussions with your Mr O'Pray that you disagree with the results provided in relation to Mr Doris’ dispensing time and supervised staff dispensing time.  Again these results are drawn from the full cost apportionment, with dispensing time calculated using the method as provided by The Federation of Ophthalmic and Dispensing Opticians and Tolley’s Value Added Tax. Discussions with our client Mr Doris and his staff also supplemented this information.  From reading your letter of 23 October 2009 you now wish to introduce some method of time-based apportionment.  I do not feel this is relevant in this case as time is not the only factor that needs to be considered when establishing the involvement of an (ophthalmic optician) in the dispensing process.  As Mr Doris does not keep time records, it would be difficult to determine his or any (ophthalmic optician’s) time involvement due to the complexity and diversity of the tasks that they undertake.
There followed some proposals for a compromise settlement.
19.	In a brief reply from HMRC dated 6 November 2009, Peter Deans was asked to clarify how they originally calculated the 56.51%, 66.82% & 62.02% time respectively spent by the ophthalmic opticians dispensing at the three outlets; and to provide a time based breakdown.  
20.	Peter Deans concluded the correspondence in a letter dated 23 November 2009, in which they directed HMRC back to the computations which had previously been produced, adding that specific time records had not been kept.  
21.	HMRC replied on 9 December 2009 with proposed figures based on the following:

Derek Doris (trading as Gardiners of Denny)
Derek  Doris                           
	£4,852.08 x 15% =                        	£727.81	
Susan Howie	£2,466.10 x 35% =	£863.13

Directly supervised persons  £1,704.28 x 10% =                      £170.42
                                                                                                 £1,761.36 /80 =
Cost of Dispensing 		£22.01	
Cost of Goods		£36.05	
Total Cost of spectacles		£58.06	
Percentage taxable    £36.05/£58.06 x 100 =                        62.09%.

Yuills of Lanark

Derek Doris	                       £2,520.29 x 30% =                       £756.08 
Directly supervised persons  £4,249.46 x 20% =                       £849.89.
	                       £1,605.97 / 54 =	
Cost of Dispensing		£29.74
	
Cost of Goods                                                  £   £  		£57.44	
Total Cost of spectacles                                   		£81.18 	
Percentage taxable     £51.44/£81.18 x 100 =                         63.36%.

Facewear Kirkintilloch : -

Derek Doris                             £143.58 x 30% =                          £43.07 
Susan Howie                         £1,233.05 x 40% =                       £493.22 
Directly supervised persons £1,803.84 x 20% =                        £360.76
.	                                                                                         £897.05 / 53 = 

Cost of Dispensing 	                                         £16.92
Cost of Goods 	                                         £30.64
Total Cost of spectacles	                             £47.56

Percentage taxable = £30.64/£47.56 x 100 =                      64.42%.

The basic figures applicable to Mr Doris, Ms Howie and the directly supervised persons, and the cost of goods were the same figures as appeared in the Schedules which were supplied by Peter Deans on 5 August 2009, the difference being in the percentage which was applied to Mr Doris, Ms Howie and the directly supervised persons for each of the outlets.  
It was in response to these figures that Mr Deans submitted the appeal on 23 December 2009.
22.	Recognising that no formal assessment had been raised, HMRC wrote to Mr Deans on 18 January 2010 with a formal assessment containing figures based on the percentages outlined in their previous letter of 9 December 2009.
On 19 February 2010, HMRC issued amended assessments with the following additional figures, based on 62.09% taxable in respect of Gardiners of Denny, 63.36% in respect of Yuills of Lanark and 64.42% in respect of Facewear Kirkintilloch:
Derek Doris t/a Gardiners of Denny	
Period 4/06  Output Tax declared £3,042.77 x 22.09% = £672.14 
Period 7/06  Output Tax declared £2,633.90 x 22.09% = £581.82 
Period 10/06 Output Tax declared £2,607.32 x 22.09% = £575.95
Period 1/07  Output Tax declared £2,118.59 x 22.09% = £467.99 
Period 4/07  Output Tax declared £2,336.89 x 22.09% = £516.21 
Period 7/07  Output Tax declared £2,154.06 x 22.09% = £475.83 
Period 10/07 Output Tax declared £2,767.63 x 22.09% = £611.36 
Period 1/08  Output Tax declared £2,343.80 x 22.09% = £517.74 
Period 4/08  Output Tax declared £3,037.58 x 22.09% = £671.00 
Period 7/08  Output Tax declared £2,625.61 x 22.09% = £579.99 
Period 10/08 Output Tax declared £2,638.82 x 22.09% = £582.91 
Period 1/09  Output Tax declared £1,289.86 x 22.09% = £284.93 
Period 4/09  Output Tax declared £1,353.48 x 22.09% = £298.98 
Period 7/09  Output Tax declared £1,238.38 x 22.09% = £273.55 
Period 10/09 Output Tax declared £1,166.84 x 22.09% = £257.75
A total (rounding down each figure) of £7,358. 
Yuills of Lanark and Facewear Kirkintilloch 
Period 1/07   	£1,118.73
Period 4/07           £736.50
Period 7/07           £692.07
Period 10/07         £341.48
Period 1/08        £1,697.89
Period 4/08           £281.54
Period 7/08             £32.01
Period 10/08      £1,035.52
Period 1/09        £1,702.94
Period 4/09           £754.18
Period 7/09        £1,300.75
Period 10/09      £1,298.47
The adjustments for input tax were then integrated into these figures, and after rounding down, brought out a net assessment of £15,795 for Yuills of Lanark (and Facewear Kirkintilloch).
Legislation
23.	Section 19 of the Value Added Tax Act 1994 (“VAT Act”), under the heading of “value of supply of goods or services”, provides that 
(4) where a supply of any goods or services is not the only matter to which a consideration in money relates, the supply shall be deemed to be for such part of the consideration as is properly attributable to it.
Section 73 of the VAT Act provides, under the heading of “Failure to make returns etc” that 
(l) 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 judgement and notify it to him.
Submissions
24.	In their letter to the Tribunal of 23 December 2009, Peter Deans submitted as follows:
This case originally arose on 25 March 2009 when we submitted on our client's behalf a Voluntary Disclosure of errors on VAT Returns for the previous three years.  Our client had been incorrectly accounting for VAT on exempt eye test income for this period on original HMRC instructions.  This led to a large repayment being due to our client.
A VAT inspection was then performed on 6 May 2009 and as a result of this inspection the local HMRC office wished to dispute the existing standard rated proportion of spectacle sales across the three shops.  The original split was 60% exempt sales and 40% standard rated sales which had been calculated by the local HMRC office.
Our local HMRC office requested a full cost apportionment calculation be performed using one months' figures.  This was duly completed using the full cost apportionment methodology and the ophthalmic dispensing time was calculated using the income basis set out by HMRC and The Federation of Ophthalmic and Dispensing Opticians.
Upon submitting these results to the local HMRC office they were again queried.  HMRC asked for a different methodology to be used for dispensing time of the opticians, using a time basis.  We argued with HMRC that we did not feel it was appropriate to calculate dispensing time in this method due to the nature of the practice and the fact that our client does not keep detailed time records.
After further offers to HMRC, which were rejected, we asked the local office to clarify their position.  Their response was to use best judgement calculations to ascertain the standard rated proportion of spectacle sales across the three shops.  Our percentages of standard rated proportion of spectacle sales and HMRC percentages are given below:-

	Peter Deans	HMRC	
Gardiners of Denny	34%	62%	
Yuills of Lanark	34%	63%	
Facewear	40%	64%

	

25.	In addressing the Tribunal, Mr Scullion referred to the case of Kirit Jayantilal Popat t/a Popat Opticians v Commissioners of Customs and Excise (2003) VAT Decision 18158.  Mr Scullion acknowledged that it was for the optician to justify the split (between dispensing and taxable services) and he submitted that the best facts were those from the Appellants computed on a cash basis.  He pointed out that on 6 May 2009, Ms Symons had not expressed any concern about the cash based apportionment and that the issue only arose after she had consulted with Mr O’Pray.  He did not accept that the assessments had been made on the basis of “best judgement” as the figures had been determined without any consultation.
26.	The Statement of Case for HMRC narrated that at the time of the visit to the Appellants’ premises in May 2009, HMRC became concerned that the Appellant`s calculations of a full cost apportionment method ("FCA") were incorrect.  HMRC were not content with the calculations for the three outlets showing the standard rate percentage of sales ranged from 34% to 40% as they did not show a breakdown of time spent on dispensing and other activities.  It was considered that the standard rate percentage was too low having regard to the number of outlets to be managed and travelling time between them.  It was also considered that the percentage of time spent by unqualified staff which had been allocated to dispensing, appeared to be high.  As the Appellants had been unwilling to carry out an exercise for an extended period of three months, HMRC, using their best judgement, calculated the undeclared output tax on a time based calculation which now forms the basis of the assessments.  It was further contended that a time based calculation was essential in order to provide an accurate reflection of how sales should have been apportioned.  The time spent on sight tests and dispensing take up on average the same amount of time, therefore, the Opthalmic Optician’s percentage of time spent on dispensing, given their other activities, should be less than 50%.  HMRC accordingly rejected the Appellants’ calculations as not accurate.  In addition, it was submitted that the dispensing percentage of time allocated to directly supervised persons was also too high because of the various other activities they need to undertake.
27.	In addressing the Tribunal, Mr Haley directed the Tribunal to s19 of the VAT Act (which provides that “where a supply of any goods or services is not the only matter to which a consideration in money relates, the supply shall be deemed to be for such part of the consideration as is properly attributable to it”).  Mr Haley accepted that there was nothing in the VAT Act to specify the method of apportionment but he submitted that the Act required the application of a “fair and reasonable” test.  Section 73 of the VAT Act, required the use of “best judgement” where information was incomplete.  The method of apportionment adopted by the Appellants did not take into account the time actually spent on each activity.  Mr Haley distinguished the case of Popat in that in that case there had been a previous agreement with the Commissioners.  He also pointed out that the Tribunal in Popat had disregarded the evidence relating to other businesses.  Mr Haley also invited the present Tribunal to disregard the subsequent cost based apportionment split of 65%/35% as that new procedure was still in its infancy.
Reasons
28.	The service that an optician provides can be broadly divided between eye testing, and the dispensing and sale of spectacles.  Eye testing is an exempt supply and that was not an issue in the present case.  Dispensing is also exempt, but this does not extend to the actual sale of the spectacles.  It is this situation which brings in s 19 of the VAT Act which provides that “where a supply of any goods or services is not the only matter to which a consideration in money relates, the supply shall be deemed to be for such part of the consideration as is properly attributable to it.”
29.	As was acknowledged by Mr Haley, there is nothing in the VAT Act to specify the method of apportionment.  The Information Sheet published by HMRC (VAT Info Sheet 08/99) sets out the background to the matter, and distinguishes between an apportionment, and making separate charges for the spectacles and dispensing – which latter method has since been adopted by the Appellants.  In regard to the former method, it was expected that opticians would agree a method with their local VAT Business Advice Centre.  This expectation has however, no statutory basis.  The Information Sheet states that the Federation of Ophthalmic and Dispensing Opticians and its tax advisers had produced a simplified explanation of a full costs apportionment method.  An annex to the Information Sheet also contained HMRC’s technical guidance about a suggested full cost apportionment method.  It is further stated “Either of these may provide the basis for an individual optician's full costs apportionment method that can be agreed with the local VAT Business Advice Centre.  Opticians may propose other apportionment methods for Customs' approval.”  However, as stated above, such expectation has no statutory basis, and there is no sanction in the event of an optician failing to seek such agreement or approval.
30.	In the course of the various communications there was a rather vague suggestion that the Appellants’ method had been agreed with HMRC, but no record of any such agreement was exhibited to the Tribunal.  However, the Tribunal accepts the explanation that when Mr Doris acquired the business of Gardiners of Denny and decided to employ the firm of Peter Deans, he agreed with Peter Deans to continue the 60%/40% split which his predecessor had used, notwithstanding that Mr Doris had a new VAT registration.  In regard to Yuills, it is extraordinary that the previous owner of the business had previously claimed 100% exemption in relation to their dispensing/sales.  Understandably the new partnership did not follow this, but adopted the split which was already being applied to Gardiners; and the partnership then proceeded to apply this to Facewear when that outlet was opened in Kirkintilloch.  There was some suggestion that the Appellants’ business had been the subject of at least one VAT inspection prior to May 2009.  Even although there may not have been any such inspection, HMRC was aware that Mr Doris had a new VAT registration in August 2004 and that the partnership was separately registered in October 2006 and that they had no record of any agreement such as is outlined in the Information Sheet referred to above.  With this background, it would have been reasonable for the Appellants to conclude that HMRC had acquiesced in the 60%/40% split which was being applied.  
31.	The Appellants had submitted voluntary disclosures on 25 March 2009 relating to overdeclared output tax, being exempt income incorrectly included with other income and thereby overstating standard rate sales.  HMRC visited the Appellants in connection with these matters on 6 May 2009 in order to verify the voluntary disclosures.  Immediately after this visit, HMRC became concerned that the Appellants` calculations based on a full cost apportionment method may have been incorrect, and they requested that figures be provided based on a months trial.  The Appellants then produced calculations for the three outlets showing standard rate percentage of sales ranged from 34% to 40%.
32.	The two assessments were issued after negotiations between the Appellants and HMRC had broken down.  Although the trial period was only for the month of June 2009, HMRC issued assessments covering the period from 2006 to 31 October 2009.  The assessment for the sum of £7,358 related to the business carried on by Mr Doris at Denny and the assessment for £15,795 related to the business carried on by Mr and Mrs Doris from the outlets at Lanark and Kirkintilloch.  These figures were net, having given allowance for some of the overdeclared output tax referred to in the preceding paragraph.
33.	The basis of the assessments would appear to be s 73 of the VAT Act which provides as follows – 
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 judgement and notify it to him.
There was no suggestion that the Appellants had failed to make any returns, or to keep any particular records and HMRC’s case appears to be that the Appellants’ returns were incorrect or perhaps that the Appellants failed to afford facilities necessary to verify such returns.  The obligation is then on HMRC to apply its “best judgement”.
34.	Disregarding the Appellants’ overdeclared output tax, were any the Appellants’ returns incorrect; or to be more specific, was the 60%/40% apportionment incorrect?  In calling for the trial which was carried out in June 2009, HMRC put the Appellants to the test.  The Appellants produced records for that month and applied the full cost apportionment method which was recognised by both HMRC and the Federation of Ophthalmic and Dispensing Opticians.  The outcome for Gardiners was a taxable element of 34.06% - well below the 40% which had been applied by Mr Doris; and for Yuills and Facewear, taxable elements of 34.06% and 40.49% would similarly have brought out an average significantly lower than the same 40%.  The Tribunal did not find any figures to correlate the percentages of calculated the 56.51 %, 66.82% & 62.02% time respectively spent by the ophthalmic opticians dispensing at the three outlets with the time available to Mr Doris and Ms Howie (having spent 33.6% and 42% respectively on eye tests in that month).  The 85% attributed to Mrs Doris in dispensing might have been high having regard to her administrative work.  However, it might be reasonable to conclude that any adjustment attributable to these aspects would be within the margin below the 40% actually applied by the Appellants.  The Tribunal therefore finds that the trial did not challenge the apportionment applied by the Appellants and that the returns were accordingly not “incorrect”.
35.	Staying with s 73, the next question is whether the Appellants “failed to afford facilities necessary to verify (their) returns”.  In their letter of 4 September 2009, HMRC indeed asked for more information which was not produced.  Assuming that the request was reasonable, the question remains whether HMRC applied its best judgement in issuing the assessments.  The schedules which accompanied Mr Deans letter of 5 August 2009, contained precise figures for the cost of goods, and the cost of providing the services of Mr Doris, Ms Howie and the supporting staff.  These schedules also contained an apportionment of the time spent by Mr Doris and Ms Howie in each of the respective outlets.  The precise figures for each of those outlets was accepted by HMRC in their letter of 9 December 2009 which provided the foundation for the subsequent assessments.  
36.	Where the HMRC figures differed was in regard to the percentage time attributable to dispensing.  In his schedules, Mr Deans had used 56.51 %, 66.82% & 62.02% respectively as the time spent by Mr Doris and Ms Howie in dispensing at the three outlets, with 85% being the corresponding figure for the supervised staff.  In contrast, HMRC (in their letter of 9 December 2009) used 15%, 30% and 30% respectively as the proportion of Mr Doris’ time engaged in dispensing at the three outlets, with 35% and 40% being the corresponding percentages for Ms Howie (she did not work at Lanark).  The corresponding figures for supervised staff was 10%, 20% and 20%.  The effect of using these much reduced figures was to reduce significantly the cost of dispensing element which resulted in the taxable proportion being in the range of 62 to 64%.
37.	What was the basis for the time percentages submitted by HMRC and which first appeared in the letter of 9 December 2009?  It is significant that the original request in the letter of 8 May 2009 was 
………. I must request that ……….Mr. Doris carries out a review of the time spent on the various activities to correctly identify what proportion of the sales time relates to dispensing.
Please furnish me with this information after one month's trial 
Information to satisfy that request was contained in the Schedules which accompanied Peter Deans’ letter of 5 August 2009.  At no time thereafter was a basis set down for the precise percentages which first appeared in the letter of 9 December 2009.  Mr O’Pray was apparently the author of that letter, but even in his evidence, he did nor explain why the precise percentages had been adopted; and Ms Symons, who was the signatory to the letter of 9 December 2009, was not called as a witness (although she was named as a potential witness and was apparently available on the day of the hearing). 
38.	The assessments under appeal covered a period from 1 February 2006 in relation to Mr Doris’ registration and from 1 November 2006 for the business registered in the name of the partnership.  The 60%/40% apportionment had been followed by the Appellants throughout this period.  This apportionment would have been apparent to HMRC and until the inspection on 6 May 2009, the apportionment was not the subject of question.  The Tribunal does not go as far as finding that there was any tacit agreement or acquiescence, such as might have caused the Tribunal to follow the decision in Kirit Jayantilal Popat t/a Popat Opticians v Commissioners of Customs and Excise.  Nevertheless, no basis was given by HMRC for extending the “9 December 2009” percentages back to 2006.
39.	It is with this background that the Tribunal finds that HMRC failed to apply best judgement to the assessments under appeal.  
40.	The appeal is accordingly upheld.  
41.	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.

JOHN M BARTON, WS
TRIBUNAL JUDGE

RELEASE DATE: 25  FEBRUARY 2011.