Tribunal Affirms Importance of 'Best Judgment' in VAT Assessments and Penalties

Citation: [2023] UKFTT 911 (TC)
Judgment on

Introduction

The case of Aleksander Vinni v The Commissioners for HMRC represents a significant examination of the principles surrounding VAT assessments and penalties within the UK tax system. The First-tier Tribunal (Tax Chamber) was tasked with scrutinizing whether the assessments and related penalties made by HMRC were done to the ‘best of their judgment’ in accordance with Section 73 of the Value Added Tax Act 1994 and relevant case law precedents.

Key Facts

Aleksander Vinni, operating a patisserie and sandwich bar, was assessed for undeclared VAT and related penalties, spanning from September 2014 to March 2018, and for a specific period of March 2019. The contentious issue revolved around the proportion of standard-rated supplies within the business and how they were calculated by HMRC for VAT returns.

HMRC’s initial assessment stemmed from a self-invigilation exercise and an earlier test purchase, which suggested a discrepancy in standard versus zero-rated sales. Vinni contended these assessments, arguing that the assessments did not reflect an honest attempt by HMRC to ascertain the accurate VAT due and that the self-invigilation period used to calculate the VAT assessments was not representative.

Several legal principles, established through case law, were considered by the tribunal:

  1. Best Judgment Assessment: Originating from the case Van Boeckel v Customs & Excise Commissioners, it requires HMRC to make an assessment honestly, based on reasonable evidence, and not arbitrarily.

  2. Separation of Assessment and Calculation: As clarified in Pegasus Birds Ltd and Rahman (No.2), there are two distinct aspects: the power under which the assessment is made and the correctness of the amount assessed.

  3. Reasonableness of HMRC’s Approach: Referencing Rahman (No.1) and Rahman (No.2), any error in HMRC’s approach must be assessed against whether it was a genuine attempt to make a reasoned assessment or if the error was of such nature that it pointed at an arbitrary or non-judgmental approach.

  4. Power to Set Aside or Amend Assessment: The Pegasus Birds case provided that the tribunal has the power to correct an amount or set aside an assessment if the process was fundamentally flawed.

  5. Futility of Appeal: According to Rule 8(2)(a) of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009, and in line with the principles of judicial review, an appeal is considered futile if there is no remedy that a tribunal can offer.

Outcomes

The First-tier Tribunal made several key decisions:

  • It directed a recalculation of the VAT assessment for the periods 09/14 to 03/18 based on an amended proportion of standard-rated sales, taking into account the miscalculations and exclusion of corporate sales.
  • It set aside the assessment for the 03/19 period, determining that the error correction presented by Vinni for the 06/18 period was valid and the subsequent refusal by HMRC was not done to the ‘best of their judgment’.
  • It also set aside the related 03/19 penalty.
  • The tribunal struck out the appeal against the penalty assessment for the 09/14 to 03/18 periods, as the penalty had already been cancelled, making the appeal futile.

Conclusion

The tribunal’s decision in Aleksander Vinni v The Commissioners for HMRC firmly underscores the necessity for HMRC to align its assessments with the legal standards of ‘best judgment’. It reinforces the importance for such assessments to be based on credible evidence and applied consistently across similar cases. In instances where HMRC’s process is inherently flawed or the application of a tax law is incorrect, the tribunal holds the authority to adjust or void the assessments and penalties. The case solidifies the taxpayer’s right to contest assessments that they believe are not made in accordance with tax laws or the principles of equity and fairness.

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