[2009] UKFTT 383 (TC)

TC00318
VALUE ADDED TAX - best judgement- tour operators margin scheme (TOMS) - appellant not applying TOMS since 1988 – numerous visits over the years – officers failed to explain scheme and raise assessments – appellant accepted TOMS applies – calculation by respondents incorrect  - suggested margin percentage incorrect – assessment consequently not to best judgment – appeal allowed - no costs awarded.

FIRST-TIER TRIBUNAL				         Appeal number: MAN/2008/1084
TAX 
					STEPHEN JOHN STANLEY	Appellant

- and -

THE COMMISSIONERS FOR
				HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

Tribunal: 	David S Porter (Judge)
		Roland Presho FCMA (Member)

Sitting in public in Leeds on 20 November 2009

Nigel Bird, of counsel, instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents and the Appellant in person

© CROWN COPYRIGHT 2009

DECISION

1.	Stephen John Stanley (the Appellant) appeals against two assessments one for the periods 06/05 to 12/06 in the sum of £18,374 (plus interest) notified by a Notice of Assessment dated 21 February 2008 and the second for the period 03/07 in the sum of £2,902 (plus interest) notified by a Notice of Assessment dated 1 May 2008. The assessment was subsequently amended by a letter dated 9 September 2008. The Appellant says that the Respondents’ officers have never advised him about what his correct margin calculation should be. Part of his business is to purchase tickets for forthcoming events and to sell them to his customers at the price at which he had bought them. He also provides transport, but as coach travel is zero rated, he has treated it as exempt.  The Respondents say that the Appellant should have been applying the Tour Operators Margin Scheme (TOMS) and it was a matter for him to decide the appropriate margin. 
2.	Nigel Bird, of counsel, instructed by the acting solicitor for the Commissioners for H M Revenue and Customs, appeared for the Respondents and produced a bundle of documents to the tribunal. He also called Joanne Findlater as a witness. The Appellant appeared in person
3.	We were referred to the cases of:
a.	Finanzamt Heidelberg v ISt internationale Sprach-und Studienreisen GmbH [2006] STC 52 and
b.	Customs and Excise Commissioners v Madgett and Baldwin (trading as Howden Court Hotel; [1998]STC  1189
The Facts
4.	The Appellant is in the entertainment business and started his business “Solid Entertainment” in 1976. Initially he produced concerts in the Grimsby area. He hired the venue; contacted the artists; printed the tickets; and advertised and promoted the events. He later expanded the business and started to book his own artists to perform at events, initially at Sheffield University. His customers requested him to purchase tickets for other events.  As a result, he would contact the venue for a public show and he would buy a block of tickets. It appears that he was not allowed to make a profit on the tickets; he therefore built his profit into the cost of the coach. For example, if the tickets were £12 each and the coach fare cost him £8, he would resell the tickets for £12 and the Coach fare for £12  per person, thus making a profit of £4, after allowing for all the other costs. He did not pay any VAT as the tickets were sold at cost and the coaches were zero rated. The Appellant stressed that his profit margin was dependent on the number of coach seats sold. He had to sell at least 30 seats to break even.  He had numerous visits from officers of the Respondents between 1988 and 2004 all whom advised that he should be using TOMS. Through the whole period and up to the hearing, the Appellant said that he was unable to use TOMS because he did not know how to work out his margin and, in any event, no VAT was payable on the tickets and the coaches were zero rated. 
In January 2000 Mrs Peck wrote again to the Appellant and referred to the fact that the Appellant had been told in 1990 that he was liable to account for VAT under TOMS. She accepted that no revenue had been lost from his failure to apply the TOMS because the tickets were always sold and cost, and he had treated the coach hire as zero rated.. However in 1996 the law changed so that all margin scheme supplies became standard rated. Mrs Peck explained the procedures to him and produced useful calculations. She explained that the figures were from his records. Using the totals only from her calculations the figures revealed for the period 6/97 to 3/98:-	

Tickets     Coaches    Total Income Ticket costs Coach Hire  Total costs

295,479     141,698       437,177          278,774         68,552          347,326

Provisional margin: 437,177 -347326 = 89,851/437,177 *100 = 20.55%

	( Note:  The ticket sales of £295,479  represent twice the coach income)	
She had commented in the letter:-
“There may be an argument to exclude your ticket sales from the calculation. However tickets are sold at cost and as you ultimately make a loss due to wastage, it is to your advantage to include them in the scheme.”
5.	Mrs Peck appears to have calculated an assessment of £17,048.66 for the periods 04-09 of 1998.  It is unclear from the evidence whether the outstanding VAT was ever collected. There only appears to have been two earlier assessments; one referred to above; and one for £5148 in 1989. The latter appears to have been collected by refusing a repayment claim. We cannot understand why assessments were not pursued after 1996, when coach trips were no longer zero rated. It was not until the present appeal that assessments have been raised. Mrs Findlater wrote to the Appellant on 29 January 2008 and assessed the Appellant to additional VAT for the periods 01/04/05 to 31/03/07 in the sum of £21277. That assessment was reduced by £3 as a result of a further review prior to the hearing. Mrs Findlater commented in that letter;
“As tickets and accommodation are sold to customers at cost price and therefore their effect upon the margin scheme calculation is nil net, the margin has been calculated utilising only coaches to concert sales figures extracted from statement of income.”
Her calculations were as follows:-
Period		Gross coaches’ income	Gross Coach hire costs
04/05-03/06	  103,968			39,045
Margin 103,968 -39,045 = 64,923 * 7/47 = £9,669
     04/06-03/07	 124,315			46,371
	Margin  124,315 – 46,371  = £77,944 *7/47 = £11,608
							(Total	£21277)
Provisional output tax percentage for Tour Operators Margin Scheme for year 01/04/07 to 31/03/08 calculated as follows.
77,944/124,315 *100 = 62.70% - You must apply this percentage to the gross selling price of your margin scheme supplies for each VAT period in the above financial year to get the provisional VAT inclusive amount of your standard rated  supplies.”
This percentage and the calculation of the outstanding VAT, without reference to any ticket sales, continued throughout all the subsequent correspondence. No attempt appears to have been made to explain how the VAT has been calculated. If it had been the Respondents would have realised that their methodology was  incorrect.
6.  Mr Presho pointed out to Mrs Findlater that her calculation was incorrect. The Appellant’s margin could not possibly be 62.70%. The reason it was so high was because she had not applied the TOMS calculation correctly. TOMS is designed to simplify the VAT calculation by adding together all the taxpayers’ income and subtracting the allowable costs to arrive at a gross profit figure. The margin percentage was applied to that gross profit figure each quarter. At the end the year the actual figures were calculated and the VAT adjusted accordingly. In calculating the margin it was necessary to include the ticket sales as indicated in Mrs Peck’s letter of January 2000. It is noted that the tickets sales in 2000 were twice the value of the coach income. Using those proportions we arrived at the following calculation:-
                   Tickets  Coaches  Total Income Ticket costs Coach Hire  Total costs

4/05 -3/07  207,936  103,968     311,904          207,936       39,645          246,981
             
Taxable profit/margin 311,904 -246,981 = £64,923 *.100/311,904 = 20.9%
     Tickets     Coaches    Total Income Ticket costs Coach Hire  Total costs
4/06-3/07   248,630   124,315         372,945         248,630          46,371          295001
	Taxable profit/margin	372,945 – 295,001 = £77,944 * 100/372,945 = 20.8%   
The VAT assessment is still almost the same 	£9,669
					Add   	  	£11,608
							£21,277
 Mr Bird conceded that the gross margin figure was incorrect because the ticket sales had not been included in the calculation, but, as he pointed out, the end result was the same. 
The law
7.  Section 53 of the Value Added Tax Act 1994 refers to the supply of goods or services by tour operators.
Section 53(3) provides  In this section “tour operator” includes a travel agent acting as a principal and any other person providing for the benefit of travellers services of any kind commonly provided by tour operators  or travel agents. 
The Value Added Tax (Tour Operators) Order 1987 (the 1987 Order) provides at paragraph 3 
A “designated travel service” is a supply of goods or services-
	(a) acquired for the purposes of his business, and
(b) supplied for the benefit of a traveller without material alteration or further processing; by a tour operator…..
Paragraph 7 states:
Subject to articles 8 and 9 of this order, the value of a designated travel service shall be determined by reference to the difference between the sums paid or payable to and the sums paid or payable by the tour operator, calculated in such manner as the Commissioners of Customs and Excise shall specify.
 Summing up
8.  Mr Bird submitted that the fact that the Appellant could not, as a matter of every day language, sensibly be described as a travel agent or tour operator does not mean that the scheme does not apply to him. The real question is does the Appellant provide services identical to, or comparable with, those of a travel agent or tour operator? It is sufficient, if the services provided include travel, so long as that travel is not merely “ancillary” or “a small proportion of the total package”. In the Appellant’s case, travel cannot properly be regarded as merely ancillary to the supply of tickets. The cost to the customer if travel was removed would simply be the face value of a ticket and the Appellant makes no profit on the sale of the tickets.. The Appellant’s trading activity falls within the 1987 Order. It is submitted that the assessment is to best judgment and that the appeal should be dismissed
9.   The Appellant submitted that at no time had he wished to avoid any liability to VAT. He was familiar with VAT in relation to other parts of his business. Unfortunately, until this hearing and Mrs Findlater’s discussions with him, he had failed to understand how TOMS worked. All he had ever wanted from all the officers, who had seen him over the years, was an indication as to his profit margin percentage and to be shown how it applied to his ticket costs, on which he made no profit, and his coach hire ,which he understood was zero rated. He accepted that he was a Tour Operator in the light of the evidence at the hearing, but he still failed  understand what his profit margin percentage should be. In view of the fact that he had been calculating his liability for the last 20 years on the basis that the tickets were neutral and the coaches were zero rated, he considered that it was unreasonable to assess him without giving him an opportunity to calculate the correct level of VAT using TOMS. He accepted that his accounts were often in arrears, but that was the nature of his business. In the circumstances his appeal should be allowed.
The decision
10.  We have considered the evidence and the law and have decided that the appeal will be allowed because the assessment is not to best judgment. The parties agreed during the appeal that the Appellant was a Tour Operator and therefore TOMS applied to his business. If the Appellant had not agreed that TOMS applied we would have decided that it does. We are, however, concerned that from 1996 no real attempt has been made by several officers either to explain the system to the Appellant, or, more particularly, to raise an assessment. The Appellant indicated in evidence that he had seen at least two accountants, neither of whom had been able to advise him with regard to the scheme. We consider that unfortunate. Whilst we have no doubt that the Appellant was both straightforward and honest in giving his evidence to the tribunal we do not accept that he did not understand the scheme. The letter from Mrs Peck in January 2000 was very clear and in fact corresponds with Mr Presho’s observations to Mr Bird during the hearing. That letter suggested a percentage of 20.55%, which is almost identical to the percentage Mr Presho calculated. The Appellant has said that all he wanted was a percentage figure. We are of the opinion that he was given that information in January 2000. Having said that, however, we have to find that the assessment is not to best judgment. The scheme is quite specific. The margin is worked out in relation to the total sales, less the appropriate costs. In her letter of 2 January 2000, Mrs Peck rightly pointed out that the ticket sales should be included in the calculation. The assessment by Mrs Findlater shows what happens if you do not include the tickets. Whilst the calculations may be almost the same as the VAT due, the margin is incorrect. It is incorrect as it only takes into account the income from the coach journeys. On any consideration 62.70% could not possibly relate to a profit. In suggesting to the Appellant that this is the figure he must use as his margin in the future, Mrs Findlater was creating a tax liability almost three times the amount he should have been paying. Further by calculation the liability without including the tickets she is not complying with paragraph 7 of the 1987 Order. No evidence was produced to the hearing as to the actual ticket sales during the periods under assessment. We have attempted to calculate the likely margin using the same ratio as in the figures produced by Mrs Peck in 2000. If the actual value of the ticket sales is much higher, then the margin will be less. Conversely if ticket sales are lower the margin will be greater. In those circumstances, it is unclear whether the VAT liability would be correct using the coach figures alone, as Mr Bird submitted. The assessment is not therefore to best judgment and the appeal is allowed.
11.  In spite of the fact that this matter has been ongoing for 20 years, we consider that the Appellant has been very fortunate, because he should have known that he should have been operating the scheme from January 2000 at least.  As a result we do not propose to award costs to the Appellant. 

TRIBUNAL JUDGE
Release date 29 December 2009