In Ernest O Bustard v HMRC [2015] UKFTT TC04703 a take-away owner successfully appealed the results of a mark-up exercise by HMRC: its assessments were not made in best judgement and were excessive.

Mr Bustard was a sole trader with a hot food take-away and fish & chip shop. He was a cash business, he cashed up daily, recording daily till totals in a cash book. Z readings were taken daily and once a week, then destroyed. The taxpayer upset HMRC: he wiped his till in advance of a VAT visit.

As no till records could not be interrogated HMRC was left with no option other than to examine purchase invoices and carry out a business economics mark-up exercise (BEE) over a three month sample of purchase invoices. HMRC calculated that the taxpayer had supressed some £750k of income.

The taxpayer engaged an agent who performed a detailed analysis of his purchases over a twelve month period. He arrived at a lower gross profit rate (GP) than HMRC who started with a GP of 73%; they later reduced this to 68% and finally 64%

The parties could not agree, HMRC raised  assessments to VAT, Income Tax and penalties for the five years from 2006/07 to 2010/11.

The taxpayer appealled on the basis that the assessments were excessive and for VAT not made to HMRC's best judgement according to section 73 VATA 1974

Conclusion of the FTT

The FTT found that HMRC:

  • did not provide any readily understandable explanation of their method and calculations in arriving at their assessment of Mr Bustard's GP.
  • did not provide any evidence to substantiate their claims that Mr Bustard's GP was too low for 2009 at 57.5%.

    • The national hot food takeaway industry average that year was only 2% higher.

    • Companies House data showed an average GPR of 51% for a hot food takeaway in 2010/11 and

    • the Bank of Ireland stated an average of 50% GPR for fast food outlets across its customer base.

  • had initially claimed that Mr Bustard's GPR was lower than similar businesses in the same area. Yet their own guidance indicated that each shop's output may be very different from neighbouring outlets for various reasons.  Their guidance also says that computing a trader's profits using GPs of other takeaways in the locality should only be used where there is no other evidence and no co-operation from the trader.  This was not the case here.

  • carried out its BEE using only three months of purchase invoices.  Mr Bustard's accountant carried out a sales restatement exercise (SRE) based on reasonably comprehensive and accurate information and records for almost a complete year.

  • had made errors in its BEE, failing to account properly for items such as wastage, condiments, oils and breads and grossing up items such as baps and lettuce which formed part of fixed price items.

  • had not followed their internal guidance. "Recalculating Profits: Business Model: Gross Profit Rate Model" says that the taxpayer should be given the opportunity to present his own calculations. Whilst this was precisely what was done. HMRC then provided no explanation as to why they did not consider this to be credible.

The judge held that the assessments were not made to best judgement, discharged all the assessments, and reduced the penalties to nil.


Despite deliberately wiping his own till readings, Mr Bustard got off. The outcome was due to a consistent lack of evidence provided by HMRC it seems a failure to follow their own internal guidance. This all came at some considerable cost for Mr Bustard, who had to recreate a whole year's books from purchase invoices, so HMRC should not be too upset: the taxpayer may decide to become more compliant in the future.

HMRC's officers in this case and also in a recent scaffolder best judgement case seem to suffer from a fatal flaw, that is the inability to stand back and ask whether, given all the information that has come to light, the assessment raised is reasonable.

Best Judgement

It is interesting to note that the wording of the judgement is technically not correct: the judge stated that the assessments to VAT and Income Tax are not to best judgement, however only a VAT assessment can be appealed on this basis.  

HMRC make an assessment for VAT purposes, and use this to assess the underpayment of income tax.  If the VAT assessment has not been made to best judgement, it follows that the Income Tax assessment then also fails.

For more information and cases on best judgement see Assessments: Best Judgement

Case reference: Ernest O Bustard v HMRC [2015] UKFTT TC04703