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In the First Tier Tribunal (FTT) case of Euro Systems (Scotland) Ltd (ESSL) the issue was whether the systems and controls of the appellant could be relied on, or whether an exercise carried out by HMRC which reconciled VAT declarations with unaudited accounts was to be preferred.
Background
HMRC issued an assessment which was a combination of input VAT claimed being overclaimed, and output tax being understated. This was on the basis that the inspector had concerns over the accuracy of records being kept, these were mainly spreadsheets and Sage. A comparison between annual accounts and the relevant returns was made leading to the assessed amount. ESSL had grown quickly, and HMRC considered that the record keeping had not kept pace. An additional point was; why was the business continuing in a VAT repayment situation if it was growing steadily and making profits as per the annual accounts?
The bookkeeping and other administration was carried out by an unqualified and unsupervised receptionist.
The appellant’s director said that the information used to generate the VAT returns was the same as that provided to a firm of chartered accountants to prepare the annual accounts for ESSL, additionally, it had several corruptions within the Sage system, which resulted in a loss of data.
Decision
It was accepted that the appellant had carried out a lot of work to investigate the records due to the corruption of Sage and manually listing many thousand invoices to support input tax claims. However, due to the number of errors and inaccuracies, the records could not be relied on and the figures from HMRC were to be preferred as the accounts had some inherent integrity from being based on double-entry accounting.
The assessment was consequently made in HMRC’s “best judgement”.
Best judgement is set out in the Van Boeckel test:
Van Boeckel “does not envisage that burden being placed on the commissioners of carrying out exhaustive investigations”.
“What the words “best of their judgment” envisage … is that the commissioners will fairly consider all material placed before them and, on that material, come to a decision which is one which is reasonable and not arbitrary as to the amount of tax which is due.”
Subject to an adjustment for the duplication of some figures by HMRC the appeal was dismissed.
Commentary
Similar reconciliations to the one carried out here, plus bank reconciliations and similar, are a staple in a standard VAT inspection. How these are carried out, and the weight given to them can be contentious and they are often used for more than a broad-brush credibility exercise. We have a good track record in having this type of assessment reduced or removed and, in nearly every case, it is worthwhile challenging any such assessment.
Of course, this case provides a reminder, should one be required, that accurate and timely records are vital to ensure tax compliance and, as we always say: Right Tax, Right Time!