The case. For four VAT quarters in 2019, Starz Traders Ltd (S) declared sales of £262,346 on its returns but banked £422,308 into its business bank account. In the absence of satisfactory evidence to account for the extra bankings, HMRC treated them as standard-rated sales and assessed output tax of £40,437.

S claimed that the difference related to four separate things: (1) an adjustment for debtors – sales from the previous period now being paid; (2) capital injections from the director; (3) a loan from an associated company; and (4) advance payments made by customers. The director claimed that the company only provided services to manufacturers in Pakistan, so no output tax was due anyway.

The law. HMRC officers have the power to issue assessments for underpaid output tax by using their best judgment. In the case of a bankings discrepancy, the onus is on the taxpayer to give evidence about the source of money if requested by HMRC. If the evidence is inadequate, HMRC can treat the difference as being relevant to extra UK sales made by the business.

The decision. The judge was satisfied that the evidence produced by S confirmed that the extra bankings mainly related to a loan and capital introduced by the director, even though the loan agreement did not make it clear which party was the borrower and lender. The judge decided that although the officer had raised a valid best judgment assessment, the numbers were calculated incorrectly. The appeal was allowed.

Despite S’s victory, the case is an important reminder that proper evidence should be retained to prove where all money comes from that is deposited into your business bank accounts. Keep proper records of any business loans from all sources, as well as capital introduced into your business by directors or business owners.