First-tier Tribunal (Tax)

[2009] UKFTT 300 (TC)

TC00244

Appeal number:  EDN/08/168

Value Added Tax – Under-declaration of Output Tax – whether additional assessment made to best of judgement – whether under-declaration made dishonestly – Sections 60, 73 and 77 VATA 1994 – Appeal refused.

FIRST-TIER TRIBUNAL

TAX

                                    QUEENSPICE LIMITED                    Appellant

                                                         - and -

                              THE COMMISSIONERS FOR HER MAJESTY’S

                                      REVENUE AND CUSTOMS (VAT)      Respondents

                                        TRIBUNAL JUDGE: Mr Kenneth Mure, QC

                                        Members:              Mrs Helen M Dunn, LL.B.

                                                                      S A Rae, LLB., WS

Sitting in public in Edinburgh on 18, 19 May and 29 September 2009

Mr Duncan Hay, Company Secretary for the Appellant

Ms Julie Strachan, Shepherd + Wedderburn LLP – instructed by the General Counsel and Solicitor to HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2009

DECISION

Introduction

1.     The subject of this appeal is an assessment to VAT for £106,504 in respect of under-declaration of output tax during the period from March 2002 to May 2008, and whether such under-declaration was made dishonestly.

2.     Mr Hay raised as a preliminary issue the Respondents’ failure to produce receipts for meals purchased by their officers or their officers’ expenses claims for reimbursement.  There were only their Witness Statements noting events which had occurred some 3½ years ago.  Best evidence, here receipts or expenses claims, should be produced to support and corroborate witness statements, he submitted.  The Respondents could not be selective in what they produced.  Best evidence apparently had been lost or destroyed.  The Appellant was accordingly prejudiced, he argued. 

3.     We did not consider that the Appeal should be allowed summarily on that basis.  Rather we reserved all questions of prejudice or unfairness in not producing receipts or expenses claims until after evidence was led, when the whole issue could be reviewed.

4.     Evidence was led on the first 2 days and we heard submissions on the concluding day.  At a preliminary hearing on 11 May 2009 we ordered the Respondents to produce certain documents (including the receipts or expenses claims noted supra) which the Appellant had sought informally some months before (see App Docs V6).  In the event expenses claims for the meals forming the test purchases described infra could not be traced. 

The Law

We were referred to Sections 73, 77 and 60 of the Value Added Tax Act 1994.  Principally Section 73(1) requires that “… where it appears to the Commissioners that [the] returns are incomplete or incorrect, they may assess the amount of VAT due from [the taxpayer] to the best of their judgement and notify it to him”.  There are prescribed time-limits for assessment.  Section 73(6)(b) indicates that in addition to the requirements of Section 77 an assessment may be made up to “… one year after evidence of facts, sufficient in the opinion of the Commissioners to justify the making of the assessment, comes to their knowledge”.  The 3 year time limit prescribed by Section 77 is extended by Sub-section (4) to 20 years if VAT has been lost inter alia as a result of conduct falling within Section 60(1), essentially dishonesty. 

Reference was made to the following authorities:-

Van Boeckel v C&E [1981] STC 290

C&E v Pegasus Birds Ltd [2004] STC 1509

Akbar & others t/a Mumtaz Paan House v C&E [2000] STC 237

Erdil Halil (LON/91/295)

Sahib Restaurant Ltd v HMRC (M7X 090)

Sirpal Trading Co Ltd (no 13288)

Mithras (Wine Bars) Ltd [2009] UKFTT 83 (TC)

Catering Cuisine Ltd (no 20652)

J&N Buttigieg t/a The Cottage Café (no 20707)

Tang & Coong t/a Man Ying (Manchester Tribunal – 5 January 2004)

The Evidence

5.     Mr Hay led as his first witness Dr Iain McLaurin, a Professional Statistician.  His views were sought on the Respondents’ methodology in projecting estimated turnover by reference to only 2 days’ actual receipts.  A sample of 2, Dr McLaurin considered, was too small to produce a reasonably accurate estimate.  As a general guide a sample of 10 was necessary in his professional opinion.  Moreover, he suggested that there could be special factors affecting turnover on any particular day, complicating the calculation, which would further undermine a small sample.

6.     Dr McLaurin acknowledged that he had not inspected the business books and other trading records of the taxpayer here.  Nor had he any experience of restaurants or the catering industry generally.  In this case, as with other commissions submitted to him, he had been provided with abstract information on which he relied for purposes of statistical analysis.

7.     The other witness led by Mr Hay was Glen Ketchen, an officer of the Respondents concerned with Direct Taxation.  He was an income tax inspector, but not trained in corporation tax.  He had been involved in this enquiry as an observer.  He confirmed that he had not been asked to make any calculation of gross or net profit for corporation tax purposes.  He agreed that the amount of further VAT claimed suggested undisclosed gross receipts in the region of £720,000.

8.     Mr Hay did not choose to lead the evidence of Mr Kabir Hossain, the only director of the Appellant company, or any of the restaurant’s staff.  It emerged in the course of the Respondents’ evidence that the controversy related to the accurate totalling of daily sales and their possible understatement.  The criticism was that the daily totals of sales recorded by the restaurant’s management and staff under-declared the actual turnover.  However, the returns so far as prepared professionally were in order on the basis of the information provided by the restaurant.

9.     Ms Strachan led in evidence the tax officers who had purchased test meals at the restaurant on 12 January 2006 and 25 February 2006.  They (Catherine Henry, Michael Egan, Gail Samson, George Brawley – their and other tax officers’ Witness Statements were accepted and agreed in the course of the hearing) gave their evidence on the basis of their notes which had been compiled immediately or shortly after their visits.  In cross-examination they accepted candidly that their recollection otherwise was poor, inevitably, because of the passage of time.  Crucially the amounts paid by the officers for their meals was recorded.  Evidence was led of 5 meals for 2 persons.  (No evidence was led about a sixth meal costing £73.65 taken on 25 January: nor was this a matter of criticism).  The officers explained that as a matter of policy they did not ask for receipts.  However, there was some confusion in relation to one receipt given to Mr Brawley, which he thought he might have left at the restaurant desk.  However the statement of Officer Fiona Halcrow (Resp Doc 4) suggests that the receipt was taken away.

10. Thereafter evidence was taken from Grant MacNaughton, another tax officer, who in a pre-arranged visit examined in July 2006 the meal slips in the restaurant’s records for 12 January 2006 and 25 February 2006 and the 2 days preceding and 2 days subsequent to each of these dates.  These records did not include bills which corresponded in their totals to the sums paid for any of the test meals.

11. Finally, Ms Strachan led the evidence of Paul Rarity, an investigating officer of the Respondents, whose responsibilities extended to VAT but not Direct Taxation.  He followed Public Notice 160 procedures, inviting cooperation in cases of suspected under-declaration.  He issued the assessment in this case after consulting with his line manager.  He acknowledged in cross-examination that he had been directed by higher management to waive any penalty.  He spoke to his calculations at in particular Resp Doc 36, 37, 38 and 40, which together indicated, he argued, an under-declaration throughout the relevant period of just over 65% of declared profit.  He maintained that 2 days’ receipts were a sufficient sample notwithstanding Dr McLaurin’s criticisms.  Mr Rarity indicated that he had 26 years experience of Customs & Excise work, recently specialising in investigations of evasion, including that by the restaurant trade.  In his experience half of such a business’ weekly sales take place on a Friday and Saturday.  The 2 days he selected for “cash ups” ie totalling a day’s sales shortly before the close of business were a Friday and a Saturday, viz 19 October 2007 and 30 August 2008.  He was satisfied that there were no special or seasonal factors e.g. sports fixtures, which might have affected turnover on these particular dates.  (Indeed no special factors affecting turnover were identified or suggested in cross-examination).  He argued that the likely weekly turnover could be obtained by adding both days’ sales together and doubling that total.  This figure was then compared with the declared weekly turnover over an extended period of 9 months.  Thus he had calculated an under-declaration of 65% (or just over) of declared profit.  To be fair in his calculations of the level of under-declaration more recent higher figures of turnover had been used.

12. Mr Rarity again insisted in cross-examination that 2 days’ “cash up” checks was sufficient for a reasonably accurate calculation in the circumstances of this business.  He indicated that he would have conducted a third such “cash up” only if criminal proceedings were contemplated.  He explained that the restaurant’s staff had been somewhat hostile to him on his second visit, but this had not influenced his decision not to make further “cash up” checks.  He was aware that the taxpayer had complained about his conduct but denied that this had influenced his attitude.

13. We found the Respondents’ officers credible and reliable throughout.  Their notes had been made carefully and timeously.  The crucial aspect about the evidence of the test meals was the total of each of the bills.  That was recorded exactly for the purposes of Mr MacNaughton’s comparison check.  Notwithstanding the expertise of Dr McLaurin we considered the views and approach of Mr Rarity reasonable in relation to this type of business.  We accepted that he was thoroughly experienced in this type of investigation and this type of business.  Indeed, we considered that he was striving to be fair throughout.  The evidence indicated that the understatement had arisen from the information supplied by the restaurant’s management and staff to its accountants.  Yet no evidence had been led from Mr Hossain or his staff which might have explained away the disparity.  The alternative figures which were before the Tribunal were, of course, those in the Returns.

Upon that evidence we make the following:

Findings-in-Fact

1.               Since June 2001 the Appellant company has been registered for VAT purposes, trading as a restaurant at 1 High Street, South Queensferry, with reg no 699866142.  It supplies meals to diners in the restaurant and also delivers takeaway meals. 

2.               Since 3 April 2006 the sole director of the Appellant has been Kabir Hossain. 

3.               The details declared in the quarterly returns for VAT of the Appellant during the period from March 2002 to November 2008 are as set out in Resps’ Doc 38.

4.               On 12 January 2006 six officers of the Respondents visited the Appellant’s restaurant incognito.  They dined there in 3 pairs, incurring bills totalling individually £38.70, £41.25 and £39.95.  These were paid in cash by them.  Receipts were not obtained and the bills submitted were retained by the Appellant’s staff after payment.

5.               On 25 February 2006 officers of the Respondents again visited the restaurant incognito.  Two meals for 2, totalling £38.55 and £40.60, were purchased.  In one case a receipt was not obtained and the bill submitted was retained by the Appellant’s staff after payment.

6.               The Appellant’s business practice was to total each day’s meal slips and keep them in daily bundles.  In these there was no trace of meal slips, receipts or other business record for the 5 amounts noted in paras 4 and 5 hereof as being the total costs of the meals consumed by the Respondents’ officers.  These totals were not included elsewhere in the Appellant’s business records.  The meal slip bundles for the particular 2 days and 2 days preceding and 2 days subsequent to each were checked. 

7.               On Friday 19 October 2007 and Saturday 30 August 2008 the Respondents’ officer, Paul Rarity, conducted “cash ups” at the Appellant’s restaurant in terms of Public Notice 160 procedure.  This involved his visiting the premises shortly before closing time and totalling the meal slips for both patrons dining within the restaurant and takeaway meals.  These totalled respectively £1620.50 and £1865.80.  Each of these was substantially more than he had expected on the basis of the turnover declared.

8.               Typically half of the weekly turnover of a restaurant business such as the Appellant’s is generated on the Friday and Saturday.  There were no especial factors present which might have affected turnover on either 19 October 2007 (Friday) or 30 August 2008 (Saturday).  The combined turnover for VAT for both days was £3486.30, thus indicating a probable weekly turnover of about £6972.60.  It was only as at 30 August 2008 that the Respondents’ officers had sufficient information to enable them reasonably to make an assessment in respect of under-declared turnover. 

9.               The total declared turnover of the Appellant for the 39 week period from November 2007 to May 2008 was £164,045 representing a weekly average turnover of £4206.  (This turnover was higher than that in earlier years).  The turnover for the 2 days which were the subject of the “cash ups” was £3486.30, exceeding the expected total of £2103 by £1383.30.  (Resps Doc 37).

10.            The under-declaration of turnover over the relevant period i.e. from March 2002 to May 2008, totalled at least 65% of the total outputs declared.  The assessment dated 4 September 2008 in respect of under-declaration of VAT calculated in Resps Docs 39 and 40 and its supporting methodology (see further the Respondents’ letters dated 14 October and 17 November 2008 – Docs 45 and 46) were reasonable and calculated to best judgement on the basis of the information available to the Respondents as at 30 August 2008.

11.            During the said period from March 2002 to May 2008 the Appellant knowingly and dishonestly under-declared its turnover for VAT.  The further VAT due has been calculated correctly at £106,504.

Parties’ Submissions

On behalf of the Respondents Ms Strachan argued at the outset that the absence of receipts and expenses claims did not undermine the Respondents’ stance.  The officers’ testimony and notes were “best evidence” and should be accepted.  She addressed the matter of the various time-limits and argued that the assessment was timeous.  On the broad merits she submitted that the assessment had been made “to best judgement”.  This was a clear case of dishonest suppression of turnover.  The Tribunal should, she argued, accept Mr Rarity’s explanations and calculations.  He had at various stages favoured the Appellant.  There had been no evidence advanced by Mr Hay to undermine these calculations, she stated.  There was no evidence that these calculations were flawed or that the “cash ups” were not a reliable approach.  Accordingly the appeal should be refused.

Mr Hay on behalf of the Appellant moved us to allow the appeal.  He attacked HMRC’s officers’ evidence as unreliable and contradictory.  The receipts for the test meals and expenses claims had not been recovered.  This, he suggested, was implausible and sinister.  The basis for Mr Rarity’s calculations was unsound.  A 2 day sample was wholly insufficient and Dr McLaurin’s view on this aspect must be accepted.  He submitted that it was curious that no penalty had been imposed on the basis of the Respondents’ account of the investigation.  He himself, as agent, had offered to meet the Respondents’ officials but this offer had not been accepted.  Moreover, the time limits for assessment had expired, and in any event the assessment (Doc 40) with a reference to “period 00” was prima facie invalid.  Accordingly the appeal must be allowed, he submitted.

Helpfully Mr Hay left a summary of his submissions for the Tribunal’s reference and this is produced. 

Decision

14. As indicated in the Introduction we reserved all questions of unfairness or prejudice from the Respondents’ failure to produce receipts or expenses claims until after the evidence was led.  Ultimately we considered that we had the best evidence in the form of the testimony of the Respondents’ officers and their contemporaneous notes.  Corroboration by way of receipts or expenses claims, as sought by Mr Hay, was not necessary in our view.  We accepted Ms Strachan’s argument that there was no need to corroborate the investigating officers’ testimony by the production of expenses claims and receipts.  “Best evidence” was primary evidence which we had by way of testimony and contemporaneous notes.  We noted the references to Walkers on Evidence (2009) ch 20 and Fraser Davidson: Evidence ch 2. 

15. The matter of time-limits arises also as a preliminary consideration.  The relevant statutory provisions are set out supra.  We consider that these are satisfied.  Crucially we agree with Ms Strachan’s approach that 30 August 2008, the date of the second “cash up”, is the crucial date for the purposes of Section 73(6)(b).  There was no real suggestion made, for instance, in cross-examination or otherwise that the necessary evidence justifying the assessment was obtained before that date.  In any event we observe that the date of the first “cash up” ie 19 October 2007, falls within one year of the assessment date viz 4 September 2008.  We note the discussion of this in Tang and Coong t/a Man Ying. 

16. The major issue for us is, of course, whether the assessment as set out in Docs 39 and 40 and in conjunction with the Respondents’ letter (Doc 46) has been made properly.  It must be made, crucially, to “best judgement”.  That, however, is on the basis of the information available to the Respondents.  The burden of correcting the quantification of the assessment to an accurate figure is on the taxpayer, who will or should have the necessary information available.  See, for instance, Erdil Halil p 3 and 4. 

17. As indicated, we found all HMRC’s officers (Mr Ketchen was, of course, the Appellant’s witness) credible and reliable and indeed conscientious in the manner in which they carried out their duties.  The examination made of the Appellant’s sales records for 12 January and 25 February 2006 was only in respect of seeking to trace the total consideration paid for each of the 5 test meals.  The notes taken by the tax officers were made, we were satisfied, immediately after the meals and were accurate.  The content of the meals was noted although not used for verification purposes.  It was established that the costs paid for the test meals were not recorded or reflected in the restaurant’s records.  We appreciate that there is the odd clerical error in the Witness Statements (eg references in Ms Halcrow’s statement to 2009 rather than 2006) and Mr Brawley’s recollection of leaving the meal receipt at the restaurant conflicts with Ms Halcrow’s statement (she did not give evidence and has left the Respondents’ employment).  Details of 5 meals on 2 dates are recorded and we are satisfied that these meals were ordered and paid for yet the consideration for them was not reflected in the declaration of outputs for VAT.  Mr MacNaughton’s efforts to trace these bills amongst the meal slips produced to him seemed thorough and satisfactory. 

18. The validity of Mr Rarity’s calculations of turnover and findings of under-declaration were inevitably controversial, and we have scrutinised them with care.  We observe the guidance given in the decisions of Van Boeckel and by the Court of Appeal in Pegasus Birds Ltd, viz that an assessment to “best judgement” must be honest and bona fide and made reasonably on the basis of the available information.  The Appellant, of course, adheres to the Returns as being accurate.  Mr Hay submitted that statistically 2 dates were wholly insufficient for such a calculation.  Dr McLaurin had, of course, suggested 10 occasions as being a reliable minimum.  On the other hand that is a theoretical view.  We were impressed by Mr Rarity’s experience and the logic of his argument.  His formula of a weekly total being divided equally between Friday and Saturday and the rest of the week is based on his lengthy experience of this type of business.  He had appreciated and anticipated the need to take dates not affected by special trading factors, which Dr McLaurin had stressed as important.  Mr Rarity’s manner of calculation had in respects tended to favour the Appellant.  The comparison of total sales was made in relation to recent turnover rather than significantly lower historical turnover, so limiting the apparent shortfall.  He had at stages “rounded down” his calculation.  The failure by the Appellant’s staff to record the test meals had not affected Mr Rarity’s calculations.  That simply indicated to him the inaccuracy of the accounts generally.  We note that in the decisions in Akbar t/a Mumtaz Paan House and Mithras (Wine Bars) Ltd 2 days’ invigilation was considered sufficient.  Indeed in Buttigieg t/a The Cottage Café a single day’s invigilation was held to be sufficient.

19. Again we observe that we did not have the benefit of the evidence of the restaurant’s management and staff to support the figures in the Returns – or indeed any intermediate figure.  The burden of proof so far as relating to the calculation and accuracy of the turnover rests on the Appellant as noted earlier.  On the other hand proof of dishonesty rests on the Respondents.  Establishing dishonesty is crucial in relation to the extension of time-limits in terms of Section 77(4) VATA noted supra.  That burden, we consider, has been discharged by them.  Inevitably, we consider, wilful dishonesty must be inferred where there is a significant shortfall in the turnover admitted over an extended period.  Such suppression of profit in our view is indicative of systematic suppression of the correct turnover.  We heard no evidence, particularly from the Appellant’s personnel, which might have altered this view.  While the standard of proof here is the balance of probabilities we appreciate that in circumstances such as the present, the strength of the evidence is important:  we refer to Sahib Restaurant Ltd paras 13-16.  We consider, therefore, that the 20 year time-limit applies.  (See Sirpal Trading Co Ltd p12 and 13).

20. Two matters raised which we have discounted are the absence to date of any additional assessment to corporation tax and the Respondents’ decision not to involve a statistician.  For this type of business we consider that direct experience provides the necessary skills to estimate profit.  So far as any further direct taxation liability is concerned we understand that this process would be initiated only after the conclusion of this Hearing. 

21. For these reasons, therefore, we consider the Respondents’ arguments well-founded.  We consider that the assessment should be upheld.  Accordingly the appeal is refused.

Costs

22. The Respondents did not seek an award of costs in the event of success.  Accordingly no order is made. 

23. Finally we would thank Ms Strachan and Mr Hay for their detailed preparation and guidance throughout the course of this Hearing.

MR KENNETH MURE, QC

TRIBUNAL JUDGE

RELEASE DATE:    6    NOVEMBER 2009