Judgment summary
L&Y Enterprise Ltd (LYE), which operates three café/bakeries in Richmond and Teddington, appealed VAT assessments totalling £91,925 for periods 12/19 to 09/23 and penalties of £15,167.63 for careless inaccuracies (1).
The Tribunal first admitted the appeal one day out of time and admitted LYE's late skeleton argument and documents, applying the principles in Martland (2)-(10). HMRC withdrew their defence of the assessments for periods 12/19 to 09/20 and 03/21 to 09/21 as out of time, but maintained their defence of the penalties for those periods (11).
The assessments arose from an HMRC till intervention which found that standard-rated sales had been materially understated compared to sums declared on VAT returns, resulting in an 'uplift ratio' of 2.298 being applied (18), (22).
The Tribunal found that HMRC made the assessments for periods 12/21 to 09/23 within time limits and to best judgment (72)-(79). However, it found that HMRC's assumption that all sales recorded as 'open items' on the till were standard-rated could not be maintained, given widespread staff misuse of that till function (85)-(87). The Tribunal found it more likely than not that the proportion of standard-rated supplies did not exceed 40%, consistent with LYE's original VAT returns (88).
On this basis, the Tribunal found that LYE had discharged the burden of showing the assessments were excessive and that no additional VAT was due, without needing to determine the precise correct amount (89)-(92). As no potential lost revenue was established, the statutory basis for the penalties was not satisfied notwithstanding careless conduct (93)-(95). The assessments were set aside, the penalties cancelled, and the appeal allowed (96).
Background
LYE has operated a business of three café/bakeries since VAT registration on 1 June 2010, selling hot and cold food and drink for eat-in or takeaway (12)-(13).
HMRC opened a compliance check into LYE's VAT returns in December 2019 following a 'test and eat' visit in May 2019 (14)-(15). Due to Covid restrictions and a bereavement affecting the director, Mrs Lamisse Hamad (LH), the check remained ongoing into 2022 (15).
Officer Chris Nicholas visited the Teddington premises in March 2022, where LH explained issues with staff misuse of the till and a till breakdown in September/October 2021 (16)-(17). HMRC's Systems and Data Compliance team obtained till data from all three premises in May 2022, revealing that standard-rated sales had been materially understated on LYE's VAT returns (18).
Officer Susan Bush issued a pre-assessment letter in November 2023, calculating an 'uplift ratio' of 2.298 based on complete till data from two periods, and assessments of £162,738 were issued on 23 November 2023 (21)-(24). Following correspondence and a meeting in December 2023, and further exchanges with LYE's agent Doshi Accountants (DA), the assessments were reduced to £92,256 in May 2024 to reflect input tax (25)-(31).
A penalty notice of £15,222.21 was issued in July 2024 (34). Following an independent review, HMRC's review conclusion letter of 6 January 2025 upheld the assessments but varied them to £91,925 total, and varied the penalties to £15,167.63 (37). LYE appealed to the Tribunal on 29 May 2025 (38).
Core dispute
The issues for determination were whether HMRC made the assessments within statutory time limits and to best judgment; if so, what amount of VAT was properly due; whether the penalties were lawfully imposed and in what amount; and whether any special reduction applied (39).
HMRC submitted that the assessments were made honestly, in good faith, and on a rational, evidence-based methodology derived from LYE's own till data, and that LYE had not produced credible evidence to displace the uplift ratio (41)-(42). HMRC also submitted that the inaccuracies were careless and that the penalties were correctly calculated (43).
LYE did not dispute best judgment at the hearing but argued that HMRC's till data analysis, which found 92% of sales to be standard-rated, was not credible for a largely cold food takeaway business, and that HMRC had wrongly assumed that all till sales recorded as 'open items' were standard-rated (46)-(47). LYE argued that the correct standard/zero-rated split, based on later till analysis after staff retraining, was around 20%/80%, and that no VAT was actually owed (47).
LYE accepted that LH had been careless in relation to VAT and till operation but argued no penalties should be payable because no VAT was owed (48).
Court findings
The Tribunal found that the assessments for periods 12/19 to 09/20 and 03/21 to 09/21 were out of time under s 73(6) VATA 1994, as they were issued more than one year after evidence sufficient to justify the assessments came to HMRC's knowledge (72). The assessments for periods 12/21 to 09/23 were found to be within time limits under s 73(6) and s 77(1) VATA 1994 (73).
Applying Van Boeckel v C&E Commissioners [1981] STC 290 and Rahman (No 2) v C&E Commissioners [2002] EWCA Civ 1881, the Tribunal found that HMRC made an honest and genuine attempt to reach a reasoned assessment based on the material available, and that the assessments for 12/21 to 09/23 were made to best judgment (74)-(79).
However, applying Pegasus Birds Ltd v C&E Commissioners [2004] STC 1509 and Rahman (No 2), the Tribunal considered it was its primary task to find the correct amount of tax due on the material before it, with the burden on the taxpayer (81)-(83).
The Tribunal found that HMRC's methodology depended on the assumption that all till 'open item' sales were standard-rated, but that this assumption could not be maintained given evidence that the open item function was widely misused by staff (85)-(87). The Tribunal found it more likely than not that the proportion of standard-rated supplies did not exceed the 40% figure used in LYE's original VAT returns (88).
The Tribunal found that LYE had discharged the burden of showing the assessments were excessive and that no additional VAT was due, without needing to determine the precise correct VAT amount (89)-(92). It further found that any inaccuracies in LYE's returns concerned misallocation between standard-rated and zero-rated supplies rather than suppression of gross takings (61).
On penalties, the Tribunal accepted that the inaccuracies were careless within paragraph 3 of Schedule 24 Finance Act 2007, but found that no loss of tax had been established for purposes of the potential lost revenue calculation, meaning the statutory basis for penalties was not satisfied (93)-(95).
Outcome
The Tribunal set aside the assessments, cancelled the penalties, and allowed the appeal (96). The Tribunal made no determination as to any entitlement to repayment (97).
Major issues / areas of contention
- Whether HMRC made the VAT assessments within the statutory time limits under s 73(6) and s 77(1) VATA 1994
- Whether HMRC made the assessments to best judgment under s 73(1) VATA 1994
- What amount, if any, of VAT was properly due, given LYE's challenge to HMRC's assumption that till 'open item' sales were standard-rated
- Whether the careless inaccuracy penalties under Schedule 24 Finance Act 2007 were lawfully imposed and in what amount
- Whether any special reduction applied to the penalties