A JEWELLERS in East Lancashire has lost out in a multi-million pound VAT battle with the taxman.

Zachary Coles, who runs Blackburn-based Ancient and Modern Ltd (A&M), had challenged a £5m VAT assessment for trading between 2014 and 2018.

HM Revenue and Customs had insisted Mr Coles had misused a second-hand margin scheme for VAT, concerning the taxation of goods re-entering a commercial taxation chain.

An assessment was issued in December 2018 for the sum of £5.474,249, reduced a year later to £5,004,5985 on review.

And a penalty of £2,802,573 was issued by HMRC, representing 56 per cent of the tax considered to have been lost through the deliberate but not concealed conduct of A&M. Mr Coles was issued with a personal liability notice for the sums.

An investigation by HMRC into the Blackburn firm, which has an appointments-only shop in New Market Street and storage facilities elsewhere, was triggered by an Italian tax authority enquiry over the sale of Piccinini watches, the court heard.

In a five-day High Court hearing, before Tax Chamber Judge Amanda Brown KC, sittiing with Ms Susan Stott, Mr Coles and A&M argued the conduct of investigating officer Riyaz Patel was so unreasonable it brought the assessment into question.

He contended that the assessments, which were not carried out under HMRC’s ‘best judgement’ principles, were ‘overstated’ and should therefore be reduced accordingly.

Mr Coles and A&M, represented by Leon Kazakos KC, ‘accepted there were inaccuracies in the VAT returns because the margin scheme was used to account for VAT on watches purchased by way of intracommunity supply and imports to which the margin scheme is inapplicable’.

The court was told the jeweller claimed the errors were not deliberate and ‘ at best they are innocent mistakes and at worst they are careless’ and as a result the personal liability order should be set aside.

But Judge Stott and Ms Stott ruled the assessments were raised in exercise of HMRC’s ‘best judgment’.

Their judgement adds: “A&M have failed to satisfy us on the evidence presented that the assessments are overstated.

“While there are individual supplies within the sample periods on which we may have reached a different conclusion to that reached by HMRC we consider them to have no consequence on the quantum of the assessments as HMRC rounded up the allowable percentage of margin scheme sales, such rounding more than accommodates for the minor adjustments to the sample periods we might otherwise have made.

“A&M deliberately rendered inaccurate VAT returns, (Mr Coles) as the director of A&M was aware both of how the margin scheme worked and that the terms of the scheme as provided in law...”

“(Mr Coles) knew the compliance conditions of the scheme were not met and nevertheless rendered VAT returns on the basis that virtually all supplies made were properly taxed under the scheme. Therefore both the penalties and the (public liability notice) were justified.”

The mitigation was also considered to be ‘entirely reasonable’ in reducing the maximum penalty from 70 per cent to 56 per cent of the lost tax.

Mr Coles and A&M have 56 days to appeal the judgement.