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The power of best judgment

11 July 2002 / Neil Warren
Categories: Comment & Analysis , VAT

Recent case law concerning best judgment VAT assessments raised by Customs using their legislative powers

'BEST JUDGMENT' IS a much-quoted phrase. For example, was Sven Goran Eriksson using his best judgment in taking a chance on David Beckham's fitness for England's opening World Cup game against Sweden? Was the producer of Coronation Street using his best judgment in deciding that the return of Bet Lynch to the programme would boost viewing figures?

The key point with best judgment is that one person's opinion or conclusion may be virtually the opposite of another person's, despite being given the same circumstances and facts. It is therefore significant that officers of Customs and Excise are given very wide powers to use their best judgment, with the phrase quoted many times in the primary legislation (section 73, VAT Act 1994).

This article therefore deals with two issues. Firstly, have recent tribunals been critical of the way that Customs have used their powers of best judgment? Secondly, what options are available to advisers when they consider that Customs have not acted fairly in dealings with clients on matters where a best judgment approach has been used?


Before progressing further, it may be useful to directly quote a couple of sections of the legislation where best judgment is mentioned.

Failure to make returns: 'Where a person has failed to make any returns required under this Act or to keep any documents … 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 judgment and to notify it to him' (section 73(1), VAT Act 1994).

Evidence of supplying goods: '… if he fails to prove that goods have been or are available to be supplied by him … they may assess to the best of their judgment and notify to him the amount of VAT that would have been chargeable in respect of the supply of the goods if they had been supplied by him' (section 73(7), VAT Act 1994).

In effect, the officer is given direct powers to deal with situations where he is not content that the VAT returns submitted by the taxpayer are either complete or accurate. The powers are particularly relevant when record keeping is not of a high standard.

Not that simple

At this stage, readers may be thinking that officers will only seek to apply best judgment when dealing with taxpayers who are either dishonest or maintain poor records. However, this is an oversimplification of the situation, as the following example illustrates.

Readers may think that the course of action taken by Customs in the Example is unacceptable. After all, is it really fair to assume that all five outlets are fiddling to the same degree? Is it reasonable to use only one night's takings to draw such radical conclusions? Was the one night chosen for the visit an exceptional trading night, e.g. bank holiday or festive period?


The sole proprietor of a restaurant business with five trading outlets has always maintained a diligent approach to keeping accurate and complete records, paying the correct amount of tax to both Customs and the Inland Revenue.

One Friday night, at closing time, Customs enter one of the restaurants and ask the manager to cash up in front of them. The takings for the evening are £800. Three weeks earlier, Customs had carried out a routine VAT inspection and noted that the best ever takings recorded on a Friday night for this particular restaurant was £500.

Customs are satisfied that they have evidence of suppression of sales and, more importantly, incomplete VAT returns. They therefore decide to make a best judgment assessment using their section 73 powers. They decide to take an average of Friday night sales declared by this particular outlet over the last three months, and compare it to the £800 they counted on the evening of their visit. This gives a percentage suppression rate, which they assume applies as well to the other four outlets. They raise an assessment for additional output tax, and use their powers to assess going back three years.

In reality, Customs always check to ensure the date chosen is an average night for the business. They avoid bank holidays and Christmas periods, and normally check the local press to ensure there is no big event likely to produce an unusually high crowd.

Also, Customs know that if the cashing up process revealed £800 actual cash against average declared takings of £500, they have identified a major problem. In cricketing terms, they are bowling at full pace and have the batsman (the restaurant proprietor) well and truly on the back foot. The approach for the taxpayer and his adviser is simple in such situations: find out what the problem is, support the true facts with evidence, and work with Customs to get the assessment reduced.

In the above Example, the proprietor maintained honest records and paid the correct tax, so there has to be another explanation of the problem. In this instance, the explanation is relatively simple: the business uses a Sage Line 50 accounting package and a bookkeeper codes up all income and expenditure each week. After the VAT problem emerged, further checks discover that she has been mixing up the branch numbers for two of the restaurants. Thus, the takings declared in the books for the restaurant checked by Customs actually relate to a smaller outlet in a neighbouring town. This error can be supported by paperwork submitted by the branches.

The above facts are presented to Customs, the best judgment assessment is withdrawn, and the trader's reputation as an honest taxpayer is restored.

Tribunal decisions

It is always interesting to consider recent case law in circumstances where best judgment is used. This is because the issues are based on an individual's interpretation of the facts, rather than a clear black and white statement of fact.

In Jade Village Chinese Restaurant (17200), Customs raised an assessment based on average meal prices sold in the restaurant multiplied by the number of customers they observed during particular evenings. The taxpayer's main source of appeal was that no customer ever ate a complete meal in the restaurant, but always shared it with another person. Therefore, he said that the average meal price should be divided by two.

The chairman dismissed the appeal, and in his report described some of the claims made by the taxpayer as 'incredible'. In effect, the taxpayers had failed to provide a satisfactory explanation concerning the sales discrepancy, and were therefore always likely to lose.

An example of how sometimes a tribunal can come up with an unusual conclusion is shown in Hussam Kudmany trading as The Kasbah (17198). Customs raised an assessment for understated takings using 'best judgment', but also went a stage further and applied a penalty for dishonest conduct by the taxpayer.

The tribunal dismissed the appeal relating to the assessment, but overturned the penalty for dishonesty. This raises the interesting question of how takings can be suppressed without an inference of dishonesty, but such thoughts are beyond the scope of this article. As a final point on this case, the tribunal chairman's report ran to an incredible 73 pages of single spaced text.

A case that went partly against Customs involved Mohammed Rahman trading as Khayam Restaurant (17135). Although the tribunal confirmed that the assessment had been made using best judgment, it was agreed (and acknowledged by Customs) that the amount assessed was excessive. It needed to be reduced 'because of an innocent error by Customs'.

One of my favourite cases involves Thomas Girdwood (17145) who ran a fish and chip shop. Customs again raised an assessment for underdeclared output tax using their section 73 powers, but Mr Girdwood put forward the case that the majority of his supplies related to cold wet fish, which are zero rated for VAT purposes. The tribunal, unsurprisingly, did not believe his explanation; after all how many fish and chip shops sell cold fish?

The case illustrates, however, why it is important for the legislation to give Customs the power to use their best judgment, since, otherwise, they would be bound to accept some of the dubious explanations put forward by taxpayers.

Taxpayer's advantage

Readers may be thinking that Customs have got best judgment assessments well worked out, and that the chances of them actually losing a tribunal case are about as remote as a British tennis player winning a title at Wimbledon! However, one particularly embarrassing case for them concerned the decision reached in The Emperor's Court Restaurant (16901).

In this case, Customs officers ate meals in the Emperor's Court and observed the number of diners. There appeared to be a suppression rate of 27 per cent, and therefore Customs issued an assessment for £71,000.

However, the taxpayer said that the number of meals consumed by the Customs officers had distorted the figures. This made a significant difference because all of the officers paid in cash and, therefore, increased substantially the proportion of takings available to be hidden. The tribunal accepted this argument, with the result that the assessment was reduced from £71,000 to £47,000.

Another case where Customs were defeated was May Wah Takeaway (16670). This case is almost a mirror image of the Example I created at the beginning of this article. Customs made the dreaded Friday night visit and calculated that the takings for the day were £687, considerably in excess of the average Friday takings declared in the records of £400. They were satisfied that suppression had taken place, and raised an assessment accordingly.

However, the tribunal chairman was not convinced and allowed the appeal with the following comments in his report:

'There is no suggestion that the amount assessed had been reached "dishonestly or vindictively or capriciously", but simply that the evidence of suppression before the tribunal was inadequate for the tribunal to be confident of making a reasonable and realistic decision that suppression had in fact taken place.'

This analysis is important, as it proves that the emphasis is clearly on Customs to ensure they have adequate evidence to support a section 73 assessment, not on the taxpayer to have to prove his innocence where this evidence is vague or incomplete.


Overall, the following conclusions can be reached.

Firstly, it is important to bear in mind the reality of the pressure on Customs officers to produce results. Significant resources are expended in cases where test eating, late night visits and observation of premises are involved, and the Chancellor expects a healthy return on such expenditure. In reality, the initial Customs assessment based on best judgment will be as high as they can realistically make it using their extensive powers.

Taking the above point into account means that, even in the most cut and dried cases, there is still likely to be scope for advisers to secure some reductions in any assessed amount.

Any challenge to a Customs assessment must be supported by realistic explanations, i.e. proper evidence and calculations. It is no good trying to come up with larger than life explanations, and expecting Customs or a tribunal to believe them.

When it comes to tribunal appeals on best judgment assessments, Customs have a very impressive overall record. This is not least because any officer's assessment is thoroughly reviewed by headquarters before it reaches an appeal. So the threat of an appeal by an adviser can often produce just as good a result as the actual appeal itself. The main aim of Customs is to discredit the declared takings of the taxpayer. Equally, the main aim of the taxpayer's adviser must be to discredit the accuracy and basis of the calculations made by Customs in reaching their assessment.

The examples referred to in this article relate to the catering/restaurant industry, mainly because this is a cash business that has been closely monitored by Customs in recent years. But the principles covered apply to all trades throughout the country.

Finally, as a general point for tax advisers, when sitting with a client listening to his explanations concerning a VAT assessment raised by Customs, always put yourself in the shoes of the Customs officer to consider how credible such explanations appear. As the case of Mr Grimwood and his cold wet fish proves, you need to ensure that the main result of the appeal is to reduce the assessment, not to give the tribunal chairman a good laugh at your client's expense.

Neil Warren is senior VAT consultant at Keens Shay Keens (Chartered Accountants) in Luton. He is also a tax and accounting lecturer at Barnfield College in Luton. He worked for Customs for 12 years.

Categories: Comment & Analysis , VAT
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