[2012] UKFTT 690 (TC)
TC02361
Appeal number:
TC/2009/11941
Income tax - amendments made to partnership profits
for years before and after year of enquiry – poor record keeping by taxpayer –
use of estimated turnover – presumption of continuity – use of best judgment by
Tribunal.
FIRST-TIER TRIBUNAL
TAX CHAMBER
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PIZZA RANCH
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Appellant
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- and -
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THE
COMMISSIONERS FOR HER MAJESTY’S
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Respondents
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REVENUE &
CUSTOMS
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TRIBUNAL:
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JUDGE W D F COVERDALE
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MRS G PRATT
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Sitting in public at Leeds on 5th, 6th and 7th July 2010
Mr T Nawaz, Accountant, for
the Appellant
Mr F Healey, Officer of HMRC,
for the Respondents
© CROWN COPYRIGHT
2012
DECISION
1.
Pizza Ranch is a food retailing business operated by Mr S Hadi
Banihashemian and Mr S Hassan Banihashemian in partnership from premises at 36
Ousegate, Selby. This is an appeal by the partnership against amendments made
to the returned partnership profits for the five accounting years ending on
31.03.2002. The amendments were made following an enquiry into the
partnership’s 2001 tax return and the adjustments were as follows:
Returned Increase Revised Legislation
profit profit
1998
34,226 51,000 85,266 S30B(1) TMA 1970
1999
42,778 52,000 94,778 S30B(1) TMA 1970
2000
33,768 54,000 87,768 S30B(1) TMA 1970
2001
24,604 55,000 79,604 S28B(1) & (2) TMA 1970 - year of
enquiry
2002 14,603 55,000 69,603 S28B(1)
& (2) TMA 1970
2.
A procedural point has been taken by Mr Nawaz, for the appellants, at
the outset of this appeal. He suggests that it might be appropriate for the
Tribunal to adjourn today’s hearing relating to HMRC’s assessments because the
matter of penalties may arise if the appeal is not wholly allowed and he
submits that his clients can may be put at a disadvantage if they are not fully
represented in respect of potential penalty issues. Indeed, he believes his
clients might be entitled to Legal Aid and to have legal representation on the
matter of penalties. He seeks “equality of arms”; he says that if penalties
have to be considered then it would be more economical to have one hearing,
relating to the assessments and penalties, rather than two separate hearings.
He does not specifically request an adjournment but says that he would not
object to an adjournment.
3.
Mr Healey, for HMRC, submits that there is no good reason why matters of
the assessments and any penalties should be heard together and there is no
authority for such a proposition (although on occasions they are heard
together). He observes that it takes time for penalty issues to be addressed,
not least because the quantum of the assessment has to be determined before any
penalty can be calculated. He submits that the assessment issues should be the
subject of this Tribunal’s determination and penalty matters should be
considered separately when this appeal is concluded.
4.
The Tribunal will not adjourn today’s hearing; the matter will proceed
to a determination of the assessment issues before the Tribunal at this time.
If any penalties are imposed following the Tribunal’s decision they can be
appealed separately; the Tribunal would endeavour to reserve the case to the
same two members who are sitting today, for the sake of continuity.
5.
In making this decision the Tribunal is mindful of the length of time
this case has been outstanding and the need to progress the matter bearing in
mind the time element of calculating and imposing any penalty and the time that
would be taken to process any further appeal.
6.
If any penalty should become a further issue for the Tribunal Legal Aid
could be considered at the appropriate time and, if granted, it would be
confined to the penalty matter only. The Tribunal today has no knowledge about
whether Legal Aid would be available in any case; appeals against assessments
are civil matters and there is no suggestion that Legal Aid could have been
granted to the appellants for today’s hearing; it is acknowledged that penalty
matters may be deemed criminal, rather than civil, but the application of Legal
Aid remains unknown.
7.
Finally, on this issue, it is concluded that the presentation of the
appellant’s case today will not be prejudiced by not knowing whether penalties
are likely to be raised.
8.
Mr Nawaz then advises the Tribunal that he continues with today’s
hearing under protest; he repeats that he feels his clients will be prejudiced;
he says that his client Mr Hadi Banihashemian struggles with the English
language. The Tribunal takes the view that there has been ample time for Mr
Hadi Banihashemian and his advisers to arrange for an interpreter to be present
but they have not done so. The point has not been raised before today’s
hearing. In fact Mr Hassan Banihashemian is to give evidence to the Tribunal
and Mr Nawaz acknowledges that this will be adequate for the purpose of
adducing oral evidence.
9.
Mr Nawaz has further taken issue over the absence from today’s hearing
of Mrs Bailey, an Inspector of taxes who had the conduct of this enquiry before
her retirement some three years ago. The Tribunal acknowledges the answer given
by Mr Healey, namely that if the appellants had wanted Mrs Bailey to attend
this Tribunal hearing they could have requested this (with a witness summons if
necessary) but they have not done so. In any case, as Mr Healey points out, the
vast majority of the evidence comes from the appellants’ own records. Mr Healey
is obviously uninhibited by the absence of Mrs Bailey and clearly has a mastery
of the issues in the case. At the request of Mr Nawaz, Mr Healey has given
evidence on oath to the Tribunal. Mr Nawaz himself has also availed himself of
the opportunity to give evidence on oath.
10.
It has been correctly observed that any enquiries into the partners’
individual tax returns are not before the Tribunal; it is only partnership
matters that are for adjudication.
11.
Returning, therefore, to the substance of today’s appeal, an enquiry
into the 2001 partnership tax return was opened on 27.12.2002 under the
provisions of S12AC(1) Taxes Management Act 1970; the enquiry was closed on
03.09.2004.
12.
The full accounts for the year ended 31.03.2001 had been produced and
disclosed a turnover figure of £120,656, a figure that was replicated in the
partnership tax return. During the course of the enquiry books and records from
which the accounts had been prepared were requested and produced; the records
were examined in detail as part of the enquiry.
13.
None of the expenses in the accounts were disallowed by HMRC and there
has been no suggestion that any of the expenses claimed should be increased.
The only entry in the accounts that was not accepted by HMRC was the turnover
figure. That is the issue before the Tribunal in this appeal.
14.
The turnover figure could be reconciled to cash book entries and entries
on the business’s submitted VAT returns. Those entries show weekly (not daily)
amounts and it was demonstrated that the weekly amounts had been calculated as
the sum of the weekly recorded figures (in the cash book) for wages, drawings,
cash expenses and cash deposited into the business bank account.
15.
Included with the books and records were not only numerous daily “Z”
readings from the till but also numerous daily individual sales receipts (which
were capable of being reconciled exactly to the entries on the “Z” readings).
Although individual sales records/”Z” readings were not held for every day of
the year HMRC’s inspector examined the records for sample periods throughout
the year (15 separate weeks). Of the 107 days included in the sample period
there were 25 days where the records were missing. Significantly, of those 25
days, 14 of the missing days were Fridays. In only one week in the sample
period were sales records held for each day (including the Friday). The sales
figure for that week, calculated using the business’s own till readings,
exceeds the corresponding figure recorded in the cash book by over £1,000 (week
ended 02.07.2000).
16.
The Tribunal has sight of documents relating to six of the sample weeks
and indeed there is a considerable volume of documentation that has been
closely scrutinised during the course of this hearing.
17.
HMRC has calculated that the sales figure for the 15 week sample period
amounts to £39,449.48 compared to the sales figure of £43,009.70 for the same
weeks as entered in the cash book. However the inclusion of what HMRC considers
to be reasonable estimates for the missing days results in a calculated sales
figure of £55,037.93 for the 15 week sample period compared to the sales figure
of £43,009.70 as recorded in the cash book, a discrepancy of £12,038.23 for the
15 week sample period.
18.
The appellants’ explanation for the discrepancy between the till records
and the cash book entries has always been that the till records do not reflect
the numerous discounts given by the business. HMRC contend that the till
records do contain evidence of both discounts given at the point of sale and
discounts given manually and there is no evidence of other discounts being given
as contended by the appellants.
19.
Much of the Tribunal’s time has been occupied with receiving evidence
about the manner in which the appellants conducted their business and gave
discounts. There were a number of mechanisms for discounts and the basis for
discounts changed on at least one occasion. There has been the most detailed
analysis of the appellants’ working papers and individual till receipts have
been scrutinised. The Tribunal has certainly grasped the finer detail of the
everyday conduct of the appellants’ business of making and selling Pizzas to
customers who call and collect them from the appellants’ premises or have them
delivered to their homes by the partners or their staff.
20.
In the course of the hearing it has been alleged by Mr Nawaz that HMRC
has deliberately destroyed items of evidence supplied by the appellants. Mr
Healey vehemently denies this. The Tribunal certainly sees no evidence of such
behaviour and finds that there has been no misconduct in the course of the
enquiry by HMRC. Mr Healey maintains throughout that it is the appellants’ own
documentation, in the form of the “Z” readings, that has enabled HMRC to
challenge the cash book entries; there would be no advantage to HMRC to destroy
evidence and such behaviour would not, in any case, bolster HMRC’s findings and
conclusions. Mr Nawaz’s allegations of “skulduggery” on the part of HMRC are
inappropriate and unwarranted.
21.
HMRC has never asked for working papers or till rolls in respect of any
year other than the year ending 31.03.2001. The conclusions and assessments for
the other years are based on the principle of continuity.
22.
The appellants’ business is a cash business. Mr Hassan Banihashemian has
described, in his evidence to the Tribunal, how he uses the till and keeps
records. He also describes the difficulties suffered by a take-away Pizza
service and in particular the monies, ingredients and products that are written
off or lost as a consequence of delinquent customers who change their minds or
decline to accept and pay for delivered products. There is an element of
malicious telephone orders that will inevitably lead to losses when they are
not accepted. The Tribunal concludes that these are aggravating and confusing
elements of this trade that will inevitably lead to a certain amount of
deficient records. It is, however difficult, to quantify the level of
discrepancies that have occurred in the appellants’ record-keeping despite the
large volume of written and oral evidence that has been considered in the
course of this appeal.
23.
It is correctly observed by HMRC that the keeping of accurate records
removes the element of risk of potential omissions from the appellants’
records; the poorer the records, the greater the risk. In this case if the
sales figure is a balancing figure it is totally reliant on the accuracy of the
four component parts which comprise it: the drawings figure, the wages figure,
the expenses figure and the cash to bank figure. If, for example, the weekly
drawings figure was, for whatever reason, understated, the business and
partners would pay £32 less in VAT and income tax for every £100 of
understatement. Moreover there would very likely be no way of detecting the
omission even from a thorough examination of the business records. HMRC
therefore seeks to establish a test to establish if the turnover figure is
wrong. This is why the daily “Z” readings from the till are considered to be of
such significance.
24.
Perceived discrepancies arising from a scrutiny of “Z” readings may arise
from the time when the readings are taken because the time of the last
transaction triggers the date change on the till; if the last transaction was
before midnight the “Z” reading will show the previous date; this has been
demonstrated and illustrated to the Tribunal by examining the documents in the
bundles. This is one of several factors that can give rise to perceived
discrepancies between the till and the cash book.
25.
It has become apparent that the appellants have been operating two
tills. There is documentary evidence of “Z” readings from a second till. This
was disputed by the appellants at interview but the evidence is clear and Mr
Hassan Banihashemian has accepted (after an initial denial), in his oral
evidence to the Tribunal, that there was a second till. He has sought to
explain that it was not used habitually but only if the main till was out of
action or for training purposes. He suggests that it was used by staff without
authority. He says that the second till would be used at busy times such as
Bank Holidays; he then acknowledges that it was used “for a few months”. His
evidence in this respect is unconvincing. The Tribunal certainly accepts that a
second till was in operation at certain times but it is open to speculation as
to the extent of its use. This has to be addressed by the Tribunal to the best
of its ability and inevitably an adverse inference is drawn against the
integrity of the appellants and their conduct of the business and the propriety
of their record-keeping
26.
It is HMRC’s contention that, given the evidence of the second till and
the evidence obtained in the 15 week sample period and the fact that “Z”
readings have so frequently not corresponded with the entries in the cash book,
it was reasonable for the inspector to conclude that the turnover shown in the
accounts to 31.03.2001 was unreliable and that the inspector was therefore
justified in substituting an alternative turnover (and profit) figure utilising
the appellants’ own till records and incorporating reasonable estimates. In
view of the apparent size of the discrepancies discovered in the enquiry year
HMRC do not consider the additions assessed by the inspector for the year ended
31.03.2001 (£55,000) to be unreasonable.
27.
In view of the level of the discrepancies discovered in the enquiry year
HMRC consider the inspector’s decision to assess similar amounts for the three
earlier years and the year following the enquiry to be justified. The
“presumption of continuity” principle has been adopted on the basis that, given
the discrepancies in the year of enquiry, similar discrepancies are likely to
have occurred in other years also.
28.
Mr Hassan Banihashemian has given affirmed evidence to the Tribunal. He
explains the operation of a till in the business and explains difficulties that
can arise out of delivery problems, discounts and problems with drivers
employed by the business. Offers to the public were changed from time to time
and this is reflected on the till rolls and individual tickets. It seems to the
Tribunal that there was much scope for confusion in this cash business and
members of the public would sometimes take advantage (improperly) of the offers
being given in the shop. Confusion was evidently particularly bad on Saturday
nights which were the busiest nights of the week.
29.
Mr Hassan Banihashemian has failed to give a satisfactory explanation
for one specific discrepancy that is put to him: during the week ending
02.07.200 the “Z” readings from the till disclose takings as follows:
26.06.2000
Monday £328.65
27.06.2000
Tuesday £345.34
28.06.2000
Wednesday £377.55
29.06.2000
Thursday £478.90
30.06.2000
Friday £903.29
01.07.2000
Saturday £1,221.70
02.07.2000 Sunday £577.85
30.
The total of these daily takings is £4233.28. The cash book figure for
that period is £3184.04: a difference of £1049.24 which is a sizeable sum for
one week. There are discrepancies in other weeks also – some quite small – but
the above week stands out as a major item which is not satisfactorily
explained. It was largely on the basis of a discrepancy at this level that HMRC
made its determination that there was a further £55,000 turnover and profit in
the period covered by the 2001 accounts.
31.
To be fair to the appellants the equivalent figures for another week –
the week ending 17.12.2000 – were “Z” readings of
11.12.2000
Monday/Tuesday £592.82
12.12.2000
13.12.2000
Wednesday £360.64
14.12.2000
Thursday £342.37
15.12.2000
Friday
16.12.2000
Saturday £870.11
17.12.2000 Sunday
£449.70.
32.
The total of these daily takings is £2,615.64; the cash book figure is
£2,613.27; the discrepancy is only £2.37. However there appear to be no
takings on the Friday which is curious. These figures demonstrate that some
caution must be exercised in assessing a pattern of figures.
33.
In his oral evidence to the Tribunal Mr Hassan Banihashemian has
confirmed that the contents of his written statement dated 28.04.10 are
correct. This statement is of some use to the Tribunal not least because it
gives a background of personal matters affecting the partners in the business
and the extent to which Mr Hassan Banihasshemian was able to supervise and give
attention to the business at material times and in particular during his
absence in London.
34.
Matters of particular note in Mr Banihashemian’s written statement are:
1) In June
2000 the business was not doing very well and Mr Banihashemian looked elsewhere
to find a remunerative business activity. He went to live in London in order to
venture into the buy-to-let market and purchased a number of properties there.
This proved to be not altogether successful for him personally. In his absence
the Pizza Ranch business in Selby was essentially run by his brother Hadi who
was not in the best of health and supervision of the business suffered. He
fears that there was a systemic abuse of the discounts and offers: drivers may
have been failing to pass on discounts to customers while keeping the discount
money for themselves.
2) Mr
Banihashemian acknowledges that “There is something wrong with the z-readings
or rather the interpretation being placed on them by HMRC ... the z-readings
are not a reliable record”. He does not acknowledge that there may be something
wrong with the cash book entries. He admits that in these respects “there is a
degree of speculation on my part”.
3) The shop
was a declining business as demonstrated by the returned profit figures listed
in paragraph 1 of this Decision, certainly after the year 1999.
4) The reason
for this decline in business was the opening of a large number of other fast
food establishments in Selby which is a small town and could not justify the
existence of so many such businesses.
5) The
declining nature of the business is evidenced by the fact that in 2008 the
business was “sold for nothing” and “given away”. It had been advertised for a
number of years without success; at one time the business could have been worth
£50,000 (generating profits up to £42,778 per annum) but eventually it became obvious
that it was not a paying proposition and despite inflation and increased prices
the sales became less than £1,500 per week.
35.
HMRC’s computations have relied on estimates, both of perceived missing
days’ takings and of the overall additions required for individual years. The
use of estimates was considered in Johnson v Scott [1978] CA 383 in
which it was said by Walton J at page 393:
“...
it is quite impossible to see how the Crown, in cases of this kind, could do
anything else but attempt to draw inferences. The true facts are known,
presumably, if known at all, to one person only – the Appellant himself. If
once it is clear that he has not put before the tax authorities the full amount
of his income, as on the quite clear inferences of fact to be made in the
present case he has not, what can then be done? Of course all estimates are
unsatisfactory; of course they will always be open to challenge in points of
detail; and of course they may well be under-estimates rather than
over-estimates as well. But what the Crown has to do in such a situation is, on
the known facts, to make reasonable inferences. When ... the Commissioners
state that (with certain exceptions) the Inspector’s figures were “fair”, that
is, in my judgment, precisely and exactly what they ought to be – fair.”
36.
HMRC’s case in respect of the years other than 2001 is based upon a
presumption of continuity, namely that any discovered failures in the year
selected for enquiry are unlikely to have occurred in that year only and are
likely to have occurred in other years as well. The inspector has gone back to
1997/98 and forward to 2001/02. This principle was addressed by Walton J in Jonas
v Bamford [1973] Ch 1 at page 25:
“...
once the Inspector comes to the conclusion that, on the facts which he has
discovered, [the appellant] has additional income beyond that which he has so
far declared to the Inspector, then the usual presumption of continuity will
apply. The situation will be presumed to go on until there is some change in
the situation, the onus of proof of which is clearly upon the taxpayer.”
37.
On the same issue it was said in Brittain v Gibb (HM Inspector of Taxes)
59 TC 374 at page 380:
One
point made ... is that the Commissioners erred in principle in that they took
[the appellant’s] accounts for one year and satisfied themselves that those
accounts were accurate and then proceeded to reject his accounts for all the
other years., when they ought to have examined his accounts and given reasons
for rejecting them in respect of that year. That I think rests on a
misconception. The Inspector fastened, not exclusively but to a large extent,
upon the accounts for one year in order to demonstrate to the Commissioners
what the Inspector submitted was the unreliability of the appellant’s accounts.
The Commissioners, having heard all the evidence, were not satisfied with the
accuracy of the accounts, and at that point they were entitled to make their
own estimate for each year under appeal.
38.
The Tribunal has carried out this exercise taking into account its
findings and conclusions from the evidence, both written and oral, given over
the course of a three day hearing of this appeal. Set out in paragraph 39 below
are the conclusions as to the proper adjustments to be made to the appellants’
accounts for the five years in question. It is right that there should be
adjustments because the evidence discloses, on the balance of probabilities,
that the turnover of the Pizza Ranch business was truly greater than that
disclosed in the annual accounts. Matters of particular significance to the
Tribunal are;
1.) Profits peaked in 1999
and in the following year Mr Hassan Banihashemian removed to London, Thereafter
the business was not run efficiently and profits declined. This pattern is
accepted by the Tribunal. Nevertheless it is the responsibility of the
taxpayers to operate their business correctly and to keep proper records,
particularly with a cash business.
2.) Prior to 1999 the
business had been expanding year by year.
3.) During the year under
scrutiny, 2001, the turnover has been proved to the satisfaction of the
Tribunal to have been substantially understated; record keeping was
unsatisfactory; the practice of using two tills is unacceptable; in that year
an addition in turnover and profit of £55,000 is the best estimate of the true
figure.
4.) In the three years
preceding 2001 the pattern of increasing turnover and profitability should
properly be reflected in the presumed increase in profit but the amounts can
properly be stated to be less than HMRC’s figures.
5.) There was a distinct
decline in the business in 2002 (resulting in its eventual demise). This can
properly be reflected in a significantly reduced addition to the declared
turnover and profit figures.
6.) The above conclusions
reflect a consistent pattern of defective record-keeping. The conclusions are
considered to be fair to the taxpayer and fair to HMRC.
39.
The Tribunal exercises its best judgment in substituting the following
figures for HMRC’s figures set out in paragraph 1 above:
Returned Increase Revised
profit
profit
1998
34,226 10,000 44,226
1999
42,778 20,000 62,778
2000
33,768 40,000 73,768
2001
24,604 55,000 79,604
2002
14,603 10,000 24,603
40.
HMRC will now need to carry out further calculations in order to assess
the new amount of tax due from the appellants.
41.
To the extent of the revised figures in paragraph 39 above, this appeal
is allowed in part.
42.
This document contains full findings of fact and reasons for the
decision. Any party dissatisfied with this decision has a right to apply for
permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure
(First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be
received by this Tribunal not later than 56 days after this decision is sent to
that party. The parties are referred to “Guidance to accompany a Decision from
the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this
decision notice.
W D F COVERDALE
TRIBUNAL JUDGE
RELEASE DATE: 9 November 2012
