20412

Value Added Tax – Notice of Assessment – taxpayer using Sage accounting
            System – discrepancies found as between information held internally on
            Sage system and that appearing on VAT returns – taxpayer claims Sage
            Summaries corrupted – request for factoring statements to be provided
            statements duly provided – taxpayer claims factoring statements inaccurate
            information requested -  substantiation of  allegations against factoring
            statements – not provided – issue of Notice of Assessment – whether made to 	best judgment – appeal dismissed

BELFAST TRIBUNAL CENTRE

	OPUS STAFF LIMITED	           Appellant

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

				Tribunal:	ALISTAIR F W DEVLIN (Chairman)
						ANTHONY HENNESSEY ACA

Sitting in public in Belfast on 12 June 2007

William Gowdy of counsel, instructed by Gray Magee, Solicitors, for the Appellant

Bernard Hayley, Solicitor for HM Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2007

DECISION

The Appeal

1. This is an appeal by Opus Staff Limited [‘the Appellant’] against a Notice of Assessments dated 9 March 2005 issued by the Respondents in the sum of £17,508. The Notice of Assessments in question was issued in respect of the quarterly tax periods 10/02 to 04/04 inclusive. In its Notice of Appeal, the Appellant stated its grounds for appeal to be follows, namely that

               ‘The amount is not due and has been incorrectly assessed by the officer 
                despite being given a detailed reconciliation to this effect she has chosen
                to ignore this.’     
                                       
The Appellant

2. The Appellant is a limited liability company carrying on in business as a staff recruitment agency, operating from premises situate at and known as 137, York Road, Belfast. The Appellant has been registered for Value Added Tax [‘VAT’] with effect from 1 May 2001 under registration number 774 2888 80. In connection with its business operations the Appellant at all material times has made use of the ‘Sage’ accounting system for record keeping. The Appellant forms part of a larger group of companies known as the Opus Group, which includes a chartered accountancy practice, a computer consultancy, and a software development company.

Facts

3. Evidence was adduced before the Tribunal in documentary form, and also via a witness statement served on behalf of the Respondent. The Tribunal also heard oral evidence from Ms Claire Reid, one of the Commissioners officers based at Custom House Square, Belfast, and from Mr Jon Dickinson, a director of the Appellant. The Tribunal also received an affidavit sworn from a witness sworn on behalf of the Appellant. From the evidence adduced before the Tribunal, both orally, and via the documentation placed before it, the Tribunal finds the following facts to be either agreed or alternatively established in evidence.

4. The Appellant was routinely visited by Ms Reid on 10 August 2004. On that occasion Ms Reid was accompanied by another officer Mr Ian Murray. The two officers met with the Appellant’s bookkeeper, a certain Mr Eoin Adams. When Sage summaries were asked for Mr Adams replied that these were not kept by the Appellant. He was asked to provide these, and he then proceeded to print these off from Sage back up discs which he produced.  A comparison was then carried out on the day in question as between the information held at the Appellant’s premises on its Sage system and that which had previously been contained in declarations made by the Appellant on and in respect of its VAT returns. This comparison exercise revealed differences and discrepancies between the two sets of figures. In those circumstances, Ms Reid and Mr Murray considered that it would be difficult to carry out further checks. The Appellant was accordingly allowed further time by the Commissioners to look into the matter and to get its records into proper order, and a further follow up visit occurred on 2 September 2004.

5. At the return visit, Ms Reid and Mr Murray again attended at the Appellant’s premises, and on this occasion Mr Jon Dickinson, a director of the Appellant was present, along with the bookkeeper Mr Adams. On this occasion, a further attempt was made to reconcile the figures produced from the Sage summaries with those previously disclosed on foot of the Appellant’s VAT returns, and again this provide impossible. This second visit was then abandoned by consent, it being agreed that the Commissioners would involve one of their computer analysts. In a letter dated 10 September 2004 sent by Mr Dickinson to the Respondents, the Appellant stated inter alia as follows:

          ‘Unfortunately, the task you are attempting is not possible following any
           Switch from Cash Accounting to Standard Rate. The original returns submitted 
           would have been a mixture of showing ‘sales’ in box 6 as either receipts or 	sales invoices [after the change to standard VAT]  which would have 	effectively over stated net sales as recorded on the VAT returns. The situation 	was further complicated by a change of year-end and a problem we 	experienced with data corruption in the period.’ 

A further follow up visit occurred on 20 October 2004. At that visit the Commissioners officers showed Mr Dickinson copies of the Sage summaries which they had been working from, and which they had obtained from the Appellant’s bookkeeper on 10 August. The response made by Mr Dickinson was to advise the officers that these summaries were of no use, since Mr Adams had, according to Mr Dickinson, corrupted the information previously stored upon the discs. Sage back up discs were requested, and Mr Dickinson response was to variously state that he did not have these discs, that he was unsure where they were, or if indeed they were available at all. Ms Reid then wrote to the Appellant by letter dated 21 October 2004. In that letter she asked for a further appointment, but also stated as follows:

          ‘As we have established that the original visit was carried out using records
           that were inaccurate can I confirm that we will carry out another VAT visit
           when you have the necessary correct records available. Can I also ask that
           if you are able to locate a Sage backup disc from the period prior to the
           switch to cash accounting, that you contact me so that I can arrange to
           collect this. We would if possible like to carry out the visit at the York Road
           premises, as we will need access to the relevant invoices and records.’

6. A further visit to the Appellant’s premises then took place on 19 November 2004. Sage summaries presented had been printed out on a number of different occasions, and once again reconciliation of the figures appearing on these summaries with those set out in the Appellant’s returns was impossible. The Appellant was again requested to make available back up Sage discs. Mr Dickinson on this occasion refused because he claimed to have issues with commercial confidentiality which according to him would prevent delivery up of the discs. In light of this refusal, Ms Reid then asked Mr Dickinson to provide her with details of the factoring arrangement which the Appellant had previously entered into. It was confirmed that the Appellant had entered into a factoring arrangement with a factoring agent whereunder payments due to the Appellant on foot of invoices issued by it were paid directly to the account of the factoring agent. The factoring statements were not available at the date of the visit on 19 November, but were specifically requested by Ms Reid on a further letter dated 22 November 2004. The Appellant initially provided only those factoring statements relating to the period during which standard accruals based accounting had been employed, but subsequently complied with a request from the Commissioners to also provide additional statements relating to the period during which the Appellant was employing cash based accounting.

7. The Tribunal accepted that by June 2005 the bulk of the factoring statements requested had been produced by the Appellant. The officers then undertook a comparison as between the contents of these factoring statements, the contents of the Appellant’s VAT returns, and the contents of its statutory accounts also submitted. Art this stage Ms Reid also enlisted the assistance of an in house accountant, Mr Cameron Reid, from whom a report was sought. Mr Cameron Reid reported on 23 November 2005. His findings were that whilst the Appellant’s VAT and statutory accounts were in general agreement one with another, the factoring statements in respect of the most recent periods were higher than both the returns and the accounts. Mr Reid also prepared a spreadsheet together with a suggested draft assessment in the sum of £14,845.00.

8. On 13 December 2005, Ms Reid wrote to the Appellant providing provisional calculations in relation to a proposed assessment based upon the findings of Mr Cameron Reid. Ms Reid indicated to the Appellant that this was the assessment which she was proposing to issue, and inviting a response from the Appellant. Mr Dickinson replied on behalf of the Appellant by means of an e-mail dated 16 December 2005 in which it was stated inter alia as follows:

             “The assumption made that all sales were standard rated in the period is
               incorrect as there were zero rated sales to RoI in the period of £8,000.

               I would be unhappy on the factoring figures as being 100% accurate.
               Particularly as Opus Staff moved from Bank of Ireland due to continual
               errors in cash allocations when we were wish them.

               I would have thought that reconciliation to the Statutory Financial
               Statements would have been a more normal accounting exercise. Obviously
               This is showing an over-payment made by the Company of £11,069.

               Notwithstanding all this I feel that we will never come to a definite
               agreement here and suggest a ‘no win no lose’ outcome……………”

Ms Reid asked for the Appellant to provide evidence to substantiate the amount of £8,000 claimed to relate to zero rated sales. This was duly provided. On 16 January 2006 Ms Reid wrote again to the Appellant making it clear that an adjustment would now be made to the contents of the proposed assessment for the zero rated sales. However, in that letter Ms Reid went on to state as follows:

              “You question the accuracy of the factoring statements however if there has
                been a problem with the factoring statements you would need to provide
                something to substantiate this. I was very careful when preparing the 
                worksheets on the factoring statements not to include amounts where
                there was obviously an adjustment made. I acknowledge what you say
                that a more normal accounting exercise would be to compare the returns
                to the Statutory Financial Statements however you would not expect
                there to be such a large discrepancy between these and the information
                provided by the factoring statements. Unless you are able to provide me
                with evidence that the factoring statements are not accurate I will use them
                in my final decision regarding assessment.”

9. A further meeting took place on 6 February 2006. At that meeting Mr Dickinson expressed concern that the Respondents were not simply content to accept the Appellant’s annual accounts. He also criticised the desire on the part of the Commissioners to rely upon the factoring statements, claiming that the Appellant had encountered persistent difficulties with their factoring company as regards its allocation of cash to incorrect accounts. Mr Dickinson was asked to produce evidence of the difficulties encountered with the factoring company. Further correspondence followed; some missing factoring statements were provided, and an arithmetical error addressed.  The Commissioners then amended their proposed assessment so as to take into account the zero rated sales, and to take into account the updated information provided by the Appellant. A Notice of Assessment in the sum of £17,508.00 together with interest thereon was then issued on 9 March 2006.

Submissions of the Appellant

10. It was argued on behalf of the Appellant that the contents of the Notice of Assessment were based upon a fundamentally flawed method of assessment. It was submitted that the correct tried and tested method for reconciling output VAT in the VAT returns was to compare it with turnover as recorded in the statutory accounts. The Appellant claimed to have carried out such an analysis, and to have submitted the same to the Commissioners. This analysis, it was submitted, showed that output VAT during the relevant period had been fully accounted for and paid.

11. The Appellant further sought to draw attention to the fact that the Appellant had moved from cash accounting to the normal invoice basis for accounting for VAT in the April 2003 period. That period served as a transitional period meaning that the output VAT on all debtors at that time was brought into the VAT return for that period. These transitional adjustments impacted upon the Appellant as if the Appellant had always accounted on the normal basis, and that cash accounting had never applied. Therefore, it was claimed, for the Commissioners to use cash receipts to reconcile output was a totally inappropriate and inaccurate method of reconciling the output VAT.

12. The Appellant sought to criticise and undermine the reliance on the part of the Commissioners upon the factoring statements. The Appellant claimed that it had ultimately discontinued to make use of the factoring facility offered by its factoring agent, the Bank of Ireland, due to numerous errors on the Bank’s part. The Appellant relied upon sample correspondence with the Bank, which it was claimed showed a pattern of such errors. The Appellant also relied upon an affidavit sworn by another customer of the Bank’s factoring service who, like the Appellant, was heavily critical of the efficiency and accuracy of recording of the factoring company insofar as the management of that customer’s own accounts had been concerned.

Submissions of the Commissioners

13. It was submitted on behalf of the Commissioners that the true issue before the Tribunal in connection with this appeal was as to whether or not the Notice of Assessment had been made to best judgment. The Respondents accepted that the Appellant had provided a reconciliation as between the sales as per the annual accounts and those declared on its VAT returns; what it had not done was to provide a reconciliation as between the information recorded on the factoring statements as to sales, and those declared on the VAT returns.

14. It was submitted on behalf of the Commissioners  that where, as here, right from the outset serious discrepancies had been found to exist as between the information held at the Appellant’s premises on its Sage system and that which had previously been contained in declarations made by the Appellant on and in respect of its VAT returns, and where, as here, a satisfactory explanation had not been received for those discrepancies, it had been perfectly right and proper for the Commissioners’ staff to have sought to access the factoring statements as an independent source of information on sales.

15. The Commissioners submitted that in advance of the Notice of Assessment having been issued, the Appellant had effectively adduced no evidence at all by which the accuracy of the factoring statements could have been seriously called into question. It was further submitted that even as of now the Appellant had not adduced satisfactory evidence to show that the factoring statement were wrong and should not have been relied upon. The Notice of Assessment accordingly it was submitted had been calculated and arrived by means of the exercise of best judgment; it should therefore be upheld and the appeal dismissed.

Decision

16. The Tribunal is fully satisfied on the basis of the evidence adduced before it that this Notice of Assessment was indeed arrived at and issued by the Commissioners as a result of the exercise by them of best judgment, and that as a result this appeal must fail.

17. Where the Commissioners make as assessment, they must assess the amount of tax due to the best of their judgment. The burden of showing that a given assessment has not been made to the best of the Commissioners judgment falls upon the taxpayer. The Court of Appeal in Rahman v Commissioners of Customs and Excise [2002] EWCA Civ 1881 [‘Rahman No. 2’] accepted the tests of whether an assessment has been made by the Commissioners to the best of their judgement which had previously been set out by Carnwath J as he then was in Rahman v Commissioners of Customs and Excise [1998] STC 825, and also by Dyson J as he then was in McNicholas Construction Co Limited v Commissioners of Customs and Excise [2000] STC 553. In Rahman No 2 Collins J in the High Court held:

                “………to show, on an appeal to the tribunal, that an assessment
               has not been made to best judgment the taxpayer must show that the
               assessment is wrong in a material respect, and that the mistake was
               such that the only inference was that the assessment was arbitrary…
               ….or……is dishonest, vindictive, or capricious, or is based on a
               spurious estimate or guess, or is wholly unreasonable.”

Subsequently, in Customs and Excise Commissioners v Pegasus Birds [2004] STC 1509, the Court of Appeal applying the decision in Rahman No 2 observed as follows:

               “ In such cases – of which the present is one – the relevant question
                  is whether the mistake is consistent with an honest and genuine
                  attempt to make a reasoned assessment of the VAT payable; or is of
                  such a nature that it compels the conclusion that no officer seeking
                  to exercise best judgment could have made it. Or there may be no
                  explanation; in which case the proper inference may be that the
                  assessment was indeed arbitrary.”

18.  On the fact of the present case, we are perfectly satisfied that nothing whatsoever remotely approaching dishonesty, vindictiveness, capriciousness or arbitrariness on the part of any of the Commissioners staff involved in the calculation and preparation of this Notice of Assessment. Indeed on the contrary, all of the evidence adduced before the Tribunal points in our view to the Commissioners endeavouring in difficult circumstances to do their level best to arrive at an assessment which was fair and accurate.

19. It needs to be remembered that, right from the outset and the date of the first visit made by the Commissioners’ officers to the premises of the Appellant, the difficulties which emerged arose out of facts and circumstances over which the Appellant had sole and exclusive knowledge and control, and for which it was solely responsible. A comparison carried out on the day of the very first visit to the Appellant’s premises revealed discrepancies as between the information held at the Appellant’s premises on its Sage system and that which had previously been contained in declarations made by the Appellant  on and in respect of its VAT returns. This comparison exercise revealed significant differences and discrepancies between the two sets of figures, which legitimately called for an explanation. Whenever the Commissioners’ officers sought from the Appellant its best explanation for the discrepancies being encountered, they were then informed by Mr Jon Dickinson, a director of the Appellant, claimed that the printouts which had been provided by the Appellant to the Commissioners and which the Commissioners’ staff had hitherto been using in their attempts to reconcile the records were not of any use insofar as the data appearing upon them had been corrupted. The Respondents were also variously informed that the Sage back up discs which had been requested were not available, had been misplaced, and might not be available at all. Subsequently, delivery up of these discs was refused ostensibly on the grounds of commercial confidentiality.

20. The Appellant had previously informed the Commissioners’ staff that a factoring arrangement had been in place as between the Appellant and a factoring company during the periods in question.  In these circumstances, in order to check the veracity or otherwise of the VAT declarations made by the Appellant, the Commissioners we find completely unsurprisingly, considered it appropriate to carry out a further comparison with information obtained from the Appellant’s factoring agent, the Bank of Ireland. This further comparison exercise indicated that for the period of 18 months ended 31 March 2003 the Appellant had overdeclared VAT on sales, but also indicated that for the year ended 31 March 2004 the Appellant had underdeclared VAT on sales.

21. As is set out above, the Appellant sought to persuade the Commissioners not to place substantial reliance upon the figures appearing in the factoring statements, claiming that the Appellant had been forced to move its custom from the Bank of Ireland, its factoring agent, due to what it contended had been continuous errors in cash allocations whilst the Appellant had been with them. 

22. In particular at a meeting which took place on 6 February 2006 Mr Dickinson expressed concern that the Commissioners were not simply content to accept the Appellant’s annual accounts. He also at that meeting criticised the desire on the part of the Commissioners to rely upon the factoring statements, claiming that the Appellant had encountered persistent and widespread difficulties with their factoring company as regards its allocation of cash to incorrect accounts. Mr Dickinson was asked to produce evidence of the difficulties encountered with the factoring company; however this we find he singularly failed to do. At the hearing of this appeal some such evidence was adduced in documentary form before the Tribunal, although having considered its very limited scope and content we are far from satisfied that that evidence goes anywhere near establishing that the difficulties encountered by the Appellant with its factoring agents the Bank of Ireland would have been such as to undermine the probative value of the factoring statements which had been produced to the Respondents officers.

23.  Nor have we received any explanation from the Appellant, either satisfactory or otherwise, as to why such material could not have been and indeed was not presented to the Commissioners before the Notice of Assessment was issued. Mr Dickinson was specifically invited in advance of the Notice of Assessment issuing to provide supporting evidence in this regard to the Commissioners, and he singularly failed to do so.

24. Having regard to the significant discrepancies  which the found as between the information held at the Appellant’s premises on its Sage system and that which had previously been contained in declarations made by the Appellant  on and in respect of its VAT returns, and having regard to the fact that such discrepancies could not be ironed out or reconciled in spite of the Appellant having been given plenty of time and opportunities within which so to do, we consider it to have been a perfectly understandable approach for the Commissioners to have adopted to have asked for and obtained the factoring statements for the relevant period in order that the contents of these might provide summary details as regards the sales being generated in the relevant periods. If there were errors or inaccuracies in the details appearing on these statements, we are fully satisfied that the Appellant had plenty of opportunity before the Notice of Assessment issued to identify these, and then to bring them to the attention of the Respondents representatives, and moreover that they did not do so.

25. For the reasons set out above, we are fully satisfied that the Notice of Assessment in this instance was prepared and issued to best judgment. It follows that this appeal is dismissed. We make no order as to costs.

ALISTAIR F W DEVLIN
CHAIRMAN

RELEASED: 24 October 2007

LON 2006/0954