VAT & Best Judgement

For businesses that make a mix of standard rated and zero-rated supplies, accurate categorisation at the till is a persistent challenge. The recent First-tier Tribunal case of L & Y Enterprise Ltd shows what can happen when those records fall short, and where HMRC's response can be pushed back.

The business operated a café and bakery, selling a combination of standard rated and zero-rated items. Staff had been ringing sales through an 'open' key on the till, which meant the VAT status of many transactions was not properly recorded.

HMRC treated the gap as under-declared VAT. Where returns appear incomplete or incorrect, the VAT legislation allows HMRC to assess the tax due to the best of their judgment. On that basis, HMRC raised assessments and added penalties for careless behaviour.

The Tribunal accepted that HMRC had reached those assessments using their best judgment. The problem lay in the assumption underneath them: HMRC had treated every sale rung through the 'open' key as standard-rated.

That is where the appeal turned. The burden sat with the taxpayer to show the assessments were excessive, not with HMRC to prove them right. The business produced evidence that the 'open' key sales were not all standard rated, and that the true position had been overstated.

The Tribunal agreed. Once the correct split was established, no additional VAT was due. With no tax outstanding, the penalties fell away too, and both the assessments and penalties were cancelled.

Two practical points stand out. First, a best judgment assessment is not the final word: it can be displaced by evidence. Second, that evidence is the taxpayer's to bring, so the quality of the underlying records often decides the outcome.

For any business handling mixed supplies, the case is a clear argument for getting point-of-sale categorisation right, and for keeping the records that can prove it.