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Cite as: [2004] UKSC SPC00423, [2004] UKSC SPC423

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Sharifee & Ors (t/a Cafe Flutist) v HM inspector of Taxes [2004] UKSC SPC00423 (21 June 2004)

SPC00423

Income tax – Profits – Determination of the profits of the opening years of a partnership business

THE SPECIAL COMMISSIONERS

FAILSAL SHARIFEE, HIYAHYA NASER, KAMARAN SIDDIQUE FALAHAT T/A CAFE FLUTIST Appellants

- and -

KENNETH CHARLES WOOD

(HM INSPECTOR OF TAXES) Respondent

Special Commissioners: M GAMMIE QC

DR DAVID WILLIAMS

Sitting in London on 4, 5, 8, 9, 10, 11, 12 December 2003, partly in public and partly in private

Robert Argles of counsel, instructed by Emanuel D Kleyman, Chartered Accountant, for the Appellant

Barry Williams, Inland Revenue Head of Unit, Appeals Unit London, for the Respondent

ANONYMIZED DECISION

This case concerns the identification of the profits earned by the business run under the name of Cafe Flutist by the three appellants Faisal Sharifee, Hiyahya Naser and Kamaran Siddique Falahat as a partnership for the initial years of that partnership. The years in question are the tax years 1993-94, 1994-95, 1995-96 and 1996-97. 1993-94 was the year in which the partnership started business. For the sake of simplicity we refer to the three partners as S, N and F, and their trading activity under the name of Cafe Flutist

as "the partnership".

Confidentiality

One procedural issue should be addressed before turning to the substance of the appeal. Part way through the hearing, an application was made by one of the parties, supported by the other, that part of the evidence be heard in private. That question is now governed by regulation 15 of the Special Commissioners (Jurisdiction and Procedure) Regulations 1994. Having heard from both parties, we agreed that the part of the hearing after the application was made (and which consisted in part of evidence being given about the transactions, income and private lives of third parties) should be in private. We decided that publicity about certain aspects of the case would not be in the interests of justice, but also that privacy was appropriate to protect the privacy of those whose personal and financial details were relevantly put in evidence but who were not parties to the appeal. We recognised that this was a balance between the public hearing that is expected under Article 6 of the European Convention on Human Rights and the rights to private and family life expected under Article 8. In this case, we had in mind that the evidence before us explored sums of income and capital that it was contended were not trading profits and/or were not the income or capital of any of the parties to the appeal. These issues went beyond the ordinary issues to be encountered in deciding the level of profits of a business.

The issue under appeal

It is agreed that the business run by the partnership started on 20 August 1993 when the first of the restaurants opened. Accounts were produced for a first period ending on 31 August 1994, and subsequently for each year ending on the anniversary of that date until the partnership ended. It is agreed that for the years with which we are concerned the following periods of account are relevant:

1993-94 From 20 August 1993 to 5 April 1994,

taken as 229/377 of the accounts to 31 August 1994.

1994-95 The first twelve months of business

taken as 365/377 of the profits to 31 August 1994

1995-96 The preceding year

taken as the profits to 31 August 1994

1996-97 A transition year under Finance Act 1994 Schedule 20, paragraph 2, taken as 365/731 of the aggregate profits for the two periods to 31 August 1996

It was also agreed that the appeals raised no unusual or difficult points of law. They are applications to the facts of the standard rules about the taxation of the trading income of a partnership under Case I of Schedule D, of the basis of assessment rules in sections 60 and 61 of the Income and Corporation Taxes Act 1988 and Schedule 20 to the Finance Act 1994, and of tax procedure and enforcement provisions. The appellants also accept that the initial burden of proof is on them, but argue that the burden has been discharged as the respondents have received all the evidence necessary to meet that obligation.

The appellant's trading activities

The partnership acquired leasehold premises in Cheam on 15 April 1993. The premises were the subject of planning permission for use as a restaurant, but needed substantial refurbishment. Once the Cheam premises were acquired, N resigned from his previous employment and devoted his full time to fitting out the Cheam premises as an Italian-style restaurant. That restaurant opened for business on 20 August 1993. S stopped full time work elsewhere in February 1994, and F stopped full time work elsewhere in April 1994, though both helped with the Cheam business in their free time before those dates, and there was evidence that both helped financially at this stage.

A second leasehold property was acquired in Guildford on 6 April 1995, and that restaurant was opened in June 1995.

A third leasehold property was acquired in Twickenham in February 1997, and that opened for business on 20 August 1997.

A further restaurant was opened in Fulham later in 1997, but this was operated by the partners through a separate limited company and its activities are not relevant to this case save by way of background.

The three restaurants in Cheam, Guildford and Twickenham were run under the same trading style with the same menus (some of which were produced to the Commissioners) and under a single trading name and single VAT registration. We were, however, given no details of the VAT aspects of the partnership trade.

The partnership was ended in 1999. The subsequent activities of the partners, the restaurants, and the company are not relevant here save as background information. However, it is relevant to note that the pattern of development that the partnership took was for each of the partners to become responsible for one of the restaurants. When the partnership was dissolved, this took the final step of each taking over one of the restaurants as a separate business although with some continuing common approaches.

The tax returns and assessments made

There is in this case an unusual degree of disagreement between the parties about the information produced and not produced by and on behalf of the partners. We therefore record our understanding of how the disagreements we are asked to determine came to be crystallised.

The partners all made tax returns for 1993-94 at some stage. The returns before us were made by N under a signature dated 16 December 1998, the same date as his 1995-6 return. It declares the partnership business (profits to be agreed) and a very small savings income. His 1994-95 return is undated (nor is the date of receipt clear) and discloses only a savings account in Jersey as a partnership account. The 1995-96 return discloses interest and dividend receipts.

The 1993-94 return by S dated 1 May 1995 and returns profits on the partnership business as to be advised, all other income being returned as nil. The 1994-95 return was signed on 1 May 1995 also, and similarly discloses no income save for the partnership. The 1995-96 return was submitted on 12 December 1998 and discloses small amounts of dividend and interest income, including the partnership bank account.

F' return for 1993-94 was signed on 16 January 1996. It discloses that F had employment income in that year and also income from the partnership, but no other income. His return for 1994-95 was signed on 1 May 1995 and discloses no income other than the partnership income. His 1995-6 return was signed on 24 July 1997 and again discloses nothing other than the partnership income.

No points were made by either side during the hearing about these returns and the dates on which they were sent and returned. We do, however, note that there is minimal income disclosed save for the partnership profits, and that the only partnership income disclosed other than the restaurant business is the joint partnership bank account in Jersey. We also note that there was only limited coordination between the partners about what they returned in these returns about the partnerships' joint bank accounts. The returns also provide confirmation that F was in employment elsewhere during 1993-94 but that otherwise the three partners had no employment income during the relevant periods.

Mr Wood gave extended evidence to us as the Inspector in charge of the case. He made an initial assessment on the three partners on 30 September 1994 in the sum of £3,000 for 1993-94 (with no NIC or interest payable). This was followed by an assessment in the sum of £15,000 for 1994-95 on 2 November 1994 (with no NIC or interest payable). The assessments were made equally on each partner. At that stage he had seen no accounts from the partnership. They were appealed in October and November 1994.

Mr Wood made an assessment for 1995-96 in August 1995 in the sum of £21,000 equally on the partners (with NICs but no interest payable). This was promptly appealed. He made an assessment for 1996-97 in the sum of £60,000 equally on the partners in November 1996 (with NICs but no interest payable). A letter dated 22 June 2001 from the Revenue confirms that no appeal was received against this assessment.

There was a further assessment on 13 January 1999 in the sum of £100,000 for 1996-97 (with NICs but no interest payable), again equally on the partners. It includes the £60,000 previously assessed for the year. On 25 January 1999 Mr Kleyman wrote on behalf of the partnership giving notice of appeal and stating that "it is our view that the assessable profit for the partnership is £90, 748 and that there is no outstanding liability to tax or Class IV contributions". There appears to have been something of a muddle over the extent of the appeal for 1996-97. It appears that the original assessment for £60,000 was not appealed, although the Revenue seems to have proceeded as though it had been appealed. The Revenue now contends that the £60,000 assessment is final, with only the additional assessment in issue. As that was not contested at the time or before us we accept that only the £40,000 further assessment is under appeal in this case. This and all previous assessments were marked as estimates and were for "Partnership income: restaurant".

On 9 May 2001 Mr Wood wrote a letter closing the investigation into the partnership accounts, with a full explanation of the Revenue's view of the tax liability of the partners. The letter is a very full analysis of the Revenue's view of both the partnership profits and of the tax affairs of each of the partners more broadly. Attached to the letter are no less than 32 separate schedules of detailed explanation or analysis. The key paragraphs and schedules defining the outcome of the enquiry as regards the partnership profits are as follows:

2 Year ended 31 August 1994

1 The business began on 20 August 1993, prior to self assessment, so these accounts form the basis period for 1993/94, 1994/95 and 1995/96. The profits have increased year on year so previous year basis rather than actual year basis is advantageous to the partnership.

126 An addition of £120,000 would give a revised gross profit rate for accounting period ended 31 August 1994 of 70% which is within an acceptable range. The Revenue is therefore seeking an addition to sales of £120,000 for the accounting period ended 31 August 1994 which would increase 1993/94 by £72,891, 1994/95 by £116,180 and 1995/96 by £116,180.

127 On the basis of the above the enclosed Schedule G shows the revised assessable profits that the Revenue would ask to be determined.

3 Year ended 31 August 1995 and 31 August 1996

1 These two periods form the basis of assessment for 1996/97 under the self assessment transition rules. The Revenue has viewed the basis of assessment to see whether actual basis would be advantageous and found that it is not.

106 An addition of £120,000 for each year would give a revised GPR (gross profit rate) for accounting periods ended 31 August 1996 66% and accounting period ended 31 August 1997 64% which is within an acceptable range.

11 The Revenue is therefore seeking an addition to sales of £120,000 for the year 1996/97.

12 I propose to send a notice of completion of partnership enquiry into the return for the year ended 5 April 1997 under 28B(5) of the Taxes Management Act 1970 in the amount shown on the enclosed Schedule L. …

4 Accounting period ended 31 August 1997

1 This accounting period forms the basis of assessment for 1997/98. The Revenue has considered the actual basis in view of the cessation on 31 January 1999 but the accounting basis is advantageous to the Revenue.

5 The Revenue has come to the conclusion on the basis of the facts available that during the accounting periods ended 31 August 1994, 1995 and 1996 there was additional income beyond that which has so far been declared. Therefore, the usual presumption of continuity will apply and the onus of proof is clearly with the taxpayer to show that there has been some change. Accordingly, I propose an addition to profits for this accounting period in the amount of £120,000 which would give a gross profit rate of 69.3% which is within an acceptable level.

Schedule G: Accounts year ended 31/08/94

Original net profit declared (comp – 21/2/95) 26471

Add – additions declared (comp – 13/11/98) 25890

Add – accountancy (agreed 14/4/98) 992

Add – own goods (suggested agent 03/03/00) 2000

Add – additional sales 120000

Total assessable profits 175353

Assessable 1993/94:

Revised profit 106514

Less – capital allowances 3825

Assessable profit 102689

Assessable 1994/95:

Revised profit 169771

Less – capital allowances 5141

Assessable profit 164630

Assessable 1995/96:

Revised profit 169771

Less – capital allowances 3856

Assessable profits 165915

Schedule L: 1996/97

Original net profit declared 221280

Less- other income -2004

Less - motor expences -3276

Add – own goods 31/8/95 and 96 8300

Less declared 2190 6110

Add – additional sales 120000

Adjusted profit 342110

Adjusted profit @365/731 170821

Less – original CA claim 32270

Less – reduction agreed 15018 -172523

Assessable profit 153569

The correspondence between the parties up to and immediately following this letter had, at least in part, unfortunately become inconclusive and, on the part of Mr Kleyman, included a strong complaint that nothing was being agreed. The correspondence concludes with a formal letter appealing the 1996/97 return by reference to a letter not in the papers (but seemingly linked with the closure letter) stating that the assessment was put at £153,569 while the partnership continued to contend it should be £90,748.

The partnership accounts and information provided

The appellants first instructed someone they met through their business contacts to act for them in their tax and VAT affairs. The firm was h

Hendersons Accounting Services. Hendersons submitted accounts for the trading period ending 31 August 1994 in January 1995. The accounts, for slightly longer than a full year, showed a net taxable profit of £26,471. However, Mr Wood, the Inspector, was not satisfied with the accounts and established that the accounts treated drawings for partners (and in particular N) as wages. Indeed, it was at first wrongly operating the PAYE system on these sums. But the tax collected by way of PAYE from N's drawings had never been remitted to the Revenue and was apparently used as a means of putting money on one side for later tax bills. It is now accepted on both sides that those accounts and the returns on which they were based were erroneous for a number of reasons, and no reliance is put on the figures in them.

As noted above, Mr Wood issued an assessment for 1995-96 on the partners for £21,000 on 31 August 1995 and started an enquiry into the partnership affairs in January 1996. The partnership then appointed new accountants, R Wilson and Co, to handle its affairs, this being notified to the Revenue in April 1996. The new accountants provided Mr Wood with amended accounts in December 1996. These reduced the sales by a small sum and the expenses by a considerable sum. The result was an uplift in the taxable profits of about £10,000 for each partner for the year.

The Revenue asked for further information following from the receipt of these accounts, and also suggested a meeting. The information was supplied shortly before a meeting that took place in October 1997. We note that at that stage the parties agreed that the accounts should start from 20 August 1993, and that any prior expenditure was pre-trading, but that this did not require any amendments to the accounts. It also follows that any income prior to that date is not partnership trading income, and we so find.

The partnership appointed Mr Kleyman as their accountant from October 1998, and it is clear from the papers that at this point there was a considerably more active exchange between the parties about outstanding matters. This led to a meeting between the three partners, Mr Kleyman and Mr Wood at Mr Wood's offices on 25 January 1999. Various records were handed over at that time.

There was a further meeting between Mr Kleyman and Mr Wood on 14 April 1999. At that interview Mr Wood indicated that he would expect cash receipts to be of the order of 30% of total income in a business of the kind run by the partnership, while the accounts showed a figure of 8%. In addition, the Revenue had established large numbers of individual bankings by the partners from the records previously handed over that were not explained in the accounts. These were regarded by the Revenue as undisclosed trading receipts. The question of interest and penalties was also raised. It is unfortunate, however, that the steps taken by both sides to reach agreement about the outstanding assessments suggested in the closure letter made no significant progress from the time of this meeting.

The issues to be determined

We have already noted the conclusions reached in the letter of closure and the assessments made. However, it is clear from the positive aspects of the correspondence and the meetings that the parties do not disagree about the deductible expenditure (including pension contributions and capital allowances) after the various adjustments made and agreed with Mr Kleyman. The disagreement relates to items of trading income (or that are assumed to have been income) located by the Revenue as a result of the papers submitted to the Revenue by Mr Kleyman. The specific issues for the Commissioners are therefore the levels of trading income for the first accounting period to 31 August 1994, and the figures for the following three years. We also have in mind that the Revenue has raised the question of the liability of the partners to penalties as a result of the way in which their returns and disclosures were made.

The evidence presented

Mr Argles presented the following witnesses and evidence. All three partners gave evidence before us. Their evidence was supported by the expert evidence of A P Silk, FCA, MCIArb, MAE, QDR, MEWI. He was asked to give, and presented, an expert report on the turnover and net profits to be expected of the partnership's restaurants for the period from 1993 to dissolution of the partnership, and also how the books and records produced compared with those of similar businesses. Mr Kleyman also gave evidence. Supporting evidence was given both orally and as written statements from witnesses who gave evidence about transfers of money to the individual partners from Iran, and as to the businesses run in the restaurants. We were also presented with a considerable amount of paperwork by way of copies of the available records of the businesses, bank statements, cheque stubs and other records, together with a copy of the correspondence between the parties.

Mr Williams presented evidence from two witnesses. Mr Wood, the inspector who dealt with the case, gave oral evidence about the assessments and investigation. Mr A Mathew FCCA, a regional accountant for the Revenue, gave expert evidence based on a review of the available accounting records for the partnership with a particular emphasis on the question whether, separately, the non-cash sales records and the cash sales records were sufficiently reliable to compute sales for the period to the end of August 1996. Supporting documentation was also presented.

The appellants' contentions

On behalf of the three partners, Mr Argles contended that the Revenue assessments based on the assumed profits for the period to 31 August 1994, in particular, were grossly excessive. He challenged both the way that the Revenue had reached its totals, and its refusal to accept any of several separate (and cumulative) explanations for unexplained bankings in the period. He accepted that the initial accounts produced for the appellants were inadequate, but submitted that the returns that had been sent by Mr Kleyman were full returns and were based on the best evidence available of the partnership profits. He also accepted that the records were not now complete, although he submitted that this was in part because it was only in 1999 that it became clear in what way the Revenue disagreed with income details from 1993 and 1994.

He submitted that the following explanations each contributed towards an overall explanation of the difference between the income returned by the partners and the undisclosed bankings identified by the Revenue:

(a) during the initial period of the business the partners were still working for a Mr Shah (for whom they had previously all worked in the restaurant business). Mr Shah was very bad at paying his trade bills, and the partners had used their own cash to pay the traders, receiving cheques in return from the Shah business;

(b) each of the three partners had families in Iran. Throughout the relevant period, the families had sent money in separate amounts from outside the United Kingdom to each of the partners individually. Much of this arrived as cash brought by couriers who brought the cash from Iran. By reason of the restrictions on taking the money out of Iran, it was unrecorded until banked at this end;

(c) there was verification for some of the bankings, but the Revenue had refused to accept it. Examples were given of individual payments including rent received separately from the partnership business.

Mr Argles also contended that the Revenue was wrong in its criticisms of the accounts kept, including in particular a challenge to the levels of cash banked by the partnership. He submitted that these could be explained in particular by two issues:

(a) how tips were handled; and

(b) the payment of staff wages from the till.

He also contended that in so far as the Revenue relied on gross profit rates and other estimates of the profitability of the business and the level of cash receipts from it, those contentions assumed too much profit from a relatively small business.

The respondent's contentions

For the Revenue, Mr Williams strongly criticised the extent of, and content of, the available records for the period before 1996. He drew attention to changes in the quality of the accounts from February 1996, when it was known, he submitted, that the business accounts were under examination. He queried in particular the relationship between the early accounts and the cash available for banking at the end of each week, and the ratio between cash sales and card sales (credit and debit cards). He accepted that the level of card sales was likely to be broadly if not exactly accurate, but queried the levels of cash sales. He emphasised the amounts of money flowing into the partner's individual private bank accounts, and the absence of documented explanations for them, and drew the conclusion that the one reflected a suppression of the other. While he accepted this was not the case of a "no accounts" assessment, there were serious deficiencies in the available records that were not made good by any other evidence or explanation. He submitted that all the figures included in the Revenue assessment were figures found in the appellants' own records. In so far as general figures such a gross profit rates had been used, this had been to check the outturn of the calculations based on those figures, and not to substitute estimates for those figures.

The expert evidence : Mr Silk's evidence

Mr Silk gave evidence that he had visited each of the three restaurants run by the partnership, although only after the period covered by this case, and had had access to the available books and accounts. He had not interviewed the appellants. He drew conclusions on four separate issues that arose out of the accounts and the dispute with the Revenue.

The first topic was the extent of the gross profit margins of the business. The final version of the accounts showed takings of £320,606 for the period to 31 August 1994, with the cost of sales being £126,760. That produced a gross profit of £175,846 or a GPM of 58.11%. In the following years it was in the range 58.0% to 63.4%. He drew attention to published expert reports showing GPMs in the region of 53% in 1992-3 and 1996 and 60-65% in 2002-3. He noted the effect of inflation and the increase in VAT levels in the early 1990s. He also stressed the volatility of restaurant businesses. He conducted an analysis from the available records of how the overall GPM would be built up. This looked separately at the mark-ups on the drinks sold and also on the food as shown on the menus. He concluded that the mark-up was 133% excluding VAT, and that the resulting GPM of 58.11% "is sustainable from the work I have undertaken".

The second topic was the proportion of cash takings to credit card takings. This starts with the contention that "I think the Revenue conceded that the reference to an expected cash sales ratio of 30% to credit cards and cheques 70% as provided to Mr Wood, the Inspector of Taxes, as reliable information within the Inland Revenue and HM Customs and Excise was unsustainable" (and he referred to the notes of the meeting on 14. 4. 1999). After detailed references to individual calculations, Mr Silk concludes that the ratio should be 13% cash and 87% credit cards and cheques, and that "I believe the records reflect a satisfactory ratio of cash takings".

He then turned to the explanation of the reasons why cash was not banked. He summarised his analysis as follows:

64 My conclusion of the reasons as the reason why cash was not banked comes down to the fact it was used to run the business, which saved on banking costs and that certain tradesmen were probably cash traders themselves. The wages were traditionally paid cash and money in the main was drawn weekly from the bank for this regular expense. Money was transferred from cash sales to cover non-cash gratuities given by the customers to the restaurant staff. I do not see that the restaurants, which from my visits are based in affluent areas, are in cash handling societies. My view is that I would have anticipated seeing the pattern I have observed in the ratios of credit cards and cheques to pure cash accordingly.

Finally, Mr Silk commented on the adequacy of documentary evidence. He acknowledged that he had had access to the four large boxes of papers handed over by Mr Kleyman to Mr Wood earlier in the enquiry, and that Mr Kleyman had also sent him further information. He had also seen VAT summaries as confirmed by HM Customs and Excise. His conclusions, after a recital of the records that were available was:

80 With the wages records it would be possible to prepare a weekly cash account, there is adequate information available. It would be possible albeit a time consuming exercise.

81 From the end of February 1996 the records included the total till Z readings (these are different to the Cardnet Z readings). I have been able to scrutinise a couple of weeks and to reconcile these with the cash book summaries. As I see it these prove to me that the same system for the cashbook was in operation throughout the period of my review.

82 In both the accounting periods to 31 August 1995 and 1996 there are a number of in house prepared summaries, which appear to be taken from the till Z readings. I consider these to be useful in my work. As statistically they provide a wealth of data. The latter ones I was able to directly compare to the till Z readings, which provided me with the measure of comfort I was requiring as to their reliability.

83 Can I draw your attention to my working notes …

84 To summarise, I consider that there was adequate documentary evidence available for the purpose of producing accurate and complete accounts.

Mr Silks report was accompanied by 42 separate "working notes" and 37 supporting documents.

Mr Silk also gave extensive oral evidence in support of his report. Broadly he confirmed his views under examination. But he also confirmed that he had not seen any payrolls records, or records of PAYE being made on wages, and he confirmed that he was not happy with those records. Nor could he recall seeing any record of tips being taken out in cash to cover cheque payments in. On the issue of mark-ups he stressed the importance of noting that the restaurants were not buying in prepared food. They were preparing it on the premises. So the margins would be higher. But he did not know the base costs of the dishes on the menu. He agreed that he had made no specific allowances for wastage in his calculations. When questioned about the reliability of the records, Mr Silk maintained that he was entirely happy about the credit card records. With regard to cheques and cash, he accepted that cheques could be diverted by having the name of the payee left blank for later insertion. He also felt that some cash had been booked as cheques when he tried to tie the records together.

He was invited to express his view about whether the restaurant business could have earned the extra sums that Mr Wood contended. Mr Silk had dealt with this in his working note 40. The number of covers at the Cheam restaurant was 69, 35 of which were on the ground floor, with the others used in busy periods (and not commonly during the daytime). In his view the additional Revenue profit figures would require, on average meal prices, "4.4 additional sittings per week of the full 69 covers, week in week out. This is the equivalent of a full sitting every weekday evening on top of the recorded trade figures." In oral evidence, he put that another way – there would need to be an additional 16,000 customers to those already taken into account.

We also heard evidence from Mr Kleyman. We accept that after he took over responsibility for the partnership tax affairs he sought to ensure that the partners made available to the Revenue all the relevant documentary evidence then available. However, it was clear that he could give no contemporary evidence about the preparation of the records or accounts or about the operation of the business during the periods in issue, and he was not cross-examined.

Mr Mathew's evidence

Mr Mathew had been asked by Mr Wood to review the accounting records provided in relation to the partnership for the periods ending 31 August 1994, 1995 and 1996. Having examined the available records, he restricted his review to the sales records provided. His review was limited by the absence of both till rolls and copy sales invoices. In the first year, however, he accepted that non-cash sales could be verified for 10 months of the 12. But he was unable to form a similar view about cheque sales.

With regard to cash sales, he presented a detailed weekly analysis of the year to 1 September 1996, with detailed analyses of two sample periods. This covered the two restaurants in
Guildford and Cheam. His conclusion on that review for the period to 31 August 1996 was:

… copy sales invoices, till rolls and daily "Z" readings are not available to support the entry for cash sales or weekly sales as recorded on weekly cash analysis sheets. Where weekly "Z" readings have been provided, these cannot be agreed to till rolls or copy invoices as these records are not available. In addition where weekly "Z" readings are available these do not agree to weekly sales as recorded in weekly cash analysis sheets on 35 out of 50 weeks. The differences range from £653 to £3. Although small differences may occur occasionally, the frequency and magnitude of differences in this case casts doubt on the veracity of the records.

Sample 2 (from the year) shows total excess cash sales of £4,432 for the two branches. This is in keeping with the overall pattern of recording cash sales in the second half of the year, where weekly Z readings have been provided. This contrasts with limited recording of cash in the first half of the year (See Appendix 1). Excess cash sales are shown as occurring on a Sunday or included within weekly total cash sales. This contrasts with the recording of non-cash sales on a daily basis. Amounts recorded cannot be reconciled to a daily cash reconciliation or verified to daily "Z" till readings, copy invoices and till rolls, as these records are not available.

In all businesses where cash is handled, I would expect to see evidence of strict controls and procedures to ensure correct accounting and prevent misappropriation. There is no evidence of any controls or procedures over cash. Cash recording is erratic and non-contemporaneous and is not capable of verification, In my opinion, this renders it unreliable.

His conclusions about sales records for the year to 31 August 1995 are:

Very limited sales records have been provided for the above period. I consider that no meaningful conclusion could be drawn from reviewing such records.

He therefore refrained from drawing any conclusions about the records for that year either cash or non-cash.

For the period to 31 August 1994, after reviewing the available records, he concluded that there was some assurance that the daily credit card sales were accurate, but he was unable to form "any firm conclusions" about non-cash sales. With regard to cash sales, he again carried out a more detailed exercise. His conclusion for the period to 31 August 1994 was similar to the similar period in 1996: "In my opinion, cash sales records are incomplete and unreliable to compute the sales for this period."

In cross-examination about both his report and that of Mr Silk, Mr Mathew declined to comment on Mr Silk's analysis of gross profit margins and said he had not looked at the point in detail. He did not agree with Mr Silk's views about the adequacy of the records or the explanations for the absences of records. He confirmed that he stood by the views he gave in the report.

The appellants' other evidence

Aside from the expert evidence, we heard oral evidence, and received witness statements, relating to the general running of the partnership business, the handling of tips, the extent to which the partners had handled cheques and cash in an irregular manner in order to accommodate the failings of Mr Shah, and about the passing of money by courier to the partners from outside the United Kingdom.

We heard, in particular, from each of the three partners.

With regard to the question of the receipt of money into the United Kingdom from Iran or elsewhere, we are prepared to accept, as the Revenue were prepared to accept, that money was brought into the country for the partners as individuals (rather than specifically for the partnership) by couriers over the relevant period. One witness gave oral evidence that he had brought money in to the country for F on an annual basis. It was illegal to take money from Iran in those days. He had no idea how much money he brought in, though he thought it was in sterling. A second witness gave oral evidence that he brought some money in for F in March 1995. Again, he did not know how much. It was Iranian currency and some English. A third witness (related to the second witness) also gave evidence of bringing money in. He had also worked for the partnership, joining in 2000 and leaving work some two months before the hearing. He again had brought money back for F. He was not paid for doing this. F had asked him to bring in the money. He was not sure how much. He had not done it recently. He thought the money was in sterling but he did not see it. After initially agreeing, he changed his mind when giving evidence and denied that he had brought in funds for S or N. A fourth witness also gave oral evidence. He told us that he had brought in money for all three partners, usually in sterling or US dollars. He did not know what the money was for, although he understood that some of the money came from the sale of a house in Iran. He also gave evidence about Mr Shah, for whom he had worked from 1983 to 1991 as an assistant manager. He had also worked for the partnership in 1999. He confirmed that he was now a close friend of S. Twelve letters from other people who confirmed that they had acted as couriers at one time or another were also produced, along with affidavits ( and attested translations from Persian) from the father of N. N's father attested that he had helped his son, using both his (the father's) income and the sale of a house to fund the transfers. The only specifically documented transfer in the period was to S from his family in Germany, the money being couriered to Germany from S's mother. The sum banked (in an account in S's name) was £1,562, paid in in Deutschmarks on 8 April 1994.

Evidence about the relationship with Mr Shah was given by Mr James Frerdick Moorehad supplied goods to Mr Shah and he confirmed that he had been paid on a number of occasions by third party cheques. He understood that the staff had received cheques from customers with the payee left blank, and he then banked those cheques as payee. Mr Shah's own cheques would bounce, and there was rarely enough cash in the business for him to be paid. He had also at first supplied the partnership in Cheam. So far as he could recall he was paid by business cheques for his supplies there, not cash. He confirmed that he had received cheques from S and F to pay for supplies after cheques from Mr Shah had bounced. Miss Brenda da Souza also gave evidence about working for Mr Shah until 1995. She agreed that she had sometimes asked for the payee to be left blank on cheques during the earlier period but not after she moved on from Mr Shah. She agreed that she was also usually paid in cash. Documentary evidence was also produced of cheques given, in particular by N, for Mr Shah.

Mr Stefan Georgiou gave brief oral evidence about handling of tips. He was a waiter at the partnership restaurants. He had authority to use the till. He would take out in cash the tip linked to a cheque or credit card sale He would do this when opening the till cash drawer. No record was kept of the amount of tips. If a manager took the tip, he put it in a box and it was shared out later.

Detailed evidence was given by each of the three partners.

F told us that he had first come to Britain in 1979, with his father, to be educated here following the revolution in Iran. After college he had worked in the catering trade, working for Mr Shah from 1983 or 1984. He met N and S while working there. They decided to set up their own business together, and did so when they found the Cheam premises in early 1993. While N had stopped work for Mr Shah to develop the premises, F had stayed on at work, providing money when necessary. He left Mr Shah's employment in April 1994 when it was agreed that the Cheam business could support them. In due course, he took over the Twickenham business. The partners had tried to provide an equal amount of money for the partnership. The accounts had been dealt with by N and by Hendersons at that time. F's job was to run the restaurant. They had used the business and accounts methods they had learnt with Mr Shah. There was a different type of till at Cheamr. It had been on the premises when they acquired it. F had had no other experience of accounts and relied on his accountants. He also gave us details about the transfer of funds from Iran but with no specific detail about individual transfers.

In reply to questions, F told us how they had dealt with accounting at Cheam, although he also confirmed that he was not responsible for adding up the takings at the end of the day save during holidays. He had only carried out full till operations at Twickenham. His job was to run the restaurant and he prepared the menus. He accepted that the accounts produced by Hendersons were wrong, and he accepted that any personal returns based on those accounts were also wrong.

N told us that he came to Britain on a student visa in 1983. He had attended courses for some time, but then left and worked for Pissaladiere. That is where he met F and S, probably in 1984. He continued working in the restaurant trade. He was offered the job of managing one of Mr Shah's restaurants and took the job. He was later promoted to being the general manager. He was paid in cash and by cheque. He left that job in April 1993 to work at the partnership business in Cheam. The pressure of Mr Shah's business had been getting at him and also F and S in late 1992, and they all agreed to set up in business, using funds they were receiving from Iran. When he left the business, he worked at restoring the Cheam premises, supported by F and S financially. He was also supported at that time by the lady who is now his wife. He helped in that way from the start of the business and also was generally responsible for the paperwork, although S dealt with the bankings and reconciliations of the takings. He was also responsible for such staff training as was done. When the restaurant started, the partners agreed that Hendersons would do the accounting for them. Hendersons registered them for VAT, and their staff collected the papers from the partnership each week. The moneys remitted from Iran were handed over to S who banked them in a Channel Isles bank account for use in the partnership. There was no clear procedure for taking drawings out of the business or for sharing out profits or paying in capital. He also gave evidence about transfers of funds from Iran, but with no specific detail about individual transfers.

In reply to questions, N confirmed that customers would be asked to leave the name of the payee on cheques blank at Shah's business but we accept his evidence that this did not happen at the partnership. With regard to the business as a whole, their policy was to keep prices competitive as compared with rival businesses. He accepted that Hendersons had produced incorrect accounts, but maintained that he had given the right figures to Hendersons. He also accepted there were omissions in his tax returns. He confirmed that tips were not recorded. He confirmed Mr Georgiou's evidence on this. He also agreed that the summaries of cash collected were not a daily record but were completed weekly. He was asked specifically about the high level of "no sale" records on the available till rolls but did not attach much importance to this. He further accepted that they had not kept a full record of drawings. The bank statements showed what had been taken out as cheques were used. When cash was taken out for drawings, there was no record. He could offer no explanation of the improvement in the accounting records and the increase in cash recorded from February 1996. He also accepted that if there was no cash in the till to pay a bill, he would pay it and then seek reimbursement. The papers contained a short series of "pie charts" analysing the receipts from the business into different categories. N told us that the pie charts were drawn up by an individual from information supplied by the business to show how the business was going. The partners used to sit down once a week to review their business and plan accordingly.

S gave evidence towards the end of the hearing, having been absent from part of the proceedings because of his health. He was born in 1951. He told us that he came to Britain in 1977 having worked for a time in an Iranian bank. He had at first gone to college, but had started working as a coffee boy and then as a chef at restaurants. He also later worked for Mr Shah, and was paid in cash. Leading up to the time when he joined the partnership business full time, he had worked for Pissaladiere, not Mr Shahi, and was paid his salary by cheque. He confirmed that from the start of the partnership business he had dealt with the bankings, and he would also work behind the bar. Because of this he would operate the till if they were less busy. In busy times everyone worked the till. They trusted the staff and in ten years only one member of staff had to be dismissed for taking money that was not his. N was responsible for cashing up. He, S, would only do it if N was not there. On rare occasions, none of the partners would be there and cashing up was then done by the manager. With regard to the partnership capital, the aim was that they would contribute capital to the partnership in equal amounts, but that did not always happen. He also gave details about transfers of funds from Iran, but again (save for one item) without specific details of individual transfers.

In reply to questions, S confirmed that orders from customers were taken in duplicate – one for the kitchen and one for the bar. The bar copy was used to make up the bill, unless it went missing, when the kitchen copy was used. They were not kept. The till used at Cheam was very basic, and he did not know what daily figures were kept save for those in the till. The till rolls had gone to Hendersons, he assumed. When pressed about certain aspects of the business, such as the way tips were dealt with between the waiting staff and the kitchen staff, he commented that he didn't need to know these things. He took his drawing by cheque, and could not remember taking any by cash. He could not comment on the accuracy of the daily and weekly transactions records as that was done by someone else. But he agreed that cash was not recorded daily.

We think it appropriate to record that at the hearing we received from Mr Wood a copy of a letter dated 25 April 1996 to him from Hendersons. This reported the appointment of R Wilson & Co to take over from Hendersons in dealing with the accounts. The letter also stated:

All books and record for the period ended 31 August 1994, including prime documents that were supplied to us were returned to the partners and we have advised them that these are required by you. We have not been supplied with the till rolls, however, we were supplied with weekly sheets detailing the takings, cash expenses made out of the takings and the balance of takings that were banked. We were also supplied with the bank statements and purchase invoices. We prepared the accounts on the basis of these records.

Mr Argles objected to the production of this letter on the basis that it was unsupported by any evidence as to its origins or accuracy. We have noted Mr Argles' objection but we see no reason to doubt its origins as a contemporaneous account of matters to the inspector by Hendersons. Whether or not its statement regarding the till rolls is accurate, the fact remains that for whatever reason they are no longer available for this period.

Evidence from the Revenue

The Revenue offered us no primary evidence in the sense that they had neither conducted visits to the restaurants nor had they undertaken any trial purchases. Nor did they offer any evidence of visits by HM Customs and Excise, although such visits did take place. We have noted expert evidence produced with respect to the records. Mr Wood also gave evidence, and was questioned extensively, about his approach to the enquiry and the conclusions he drew in his letter of closure. As this related to the basis on which he approached the conclusions he drew in reaching the conclusions set out at the head of this decision, we see no point in setting out that evidence and opinion in full here. Mr Argles used his cross-examination of Mr Wood to present the appellants' case. We do not feel it necessary to record Mr Wood's evidence in chief or under cross-examination in full. Save for a few small aspects of the evidence, it amounted to a consistent rejection of the various parts of the case put to him by Mr Argles on behalf of his clients. At the end of the hearing we offered both parties the opportunity to deal jointly with the points taken up by Mr Argles with Mr Wood. We record the result in the next paragraphs.

The invitation for a further submission

During the course of the hearing, as noted, we were taken to a wide range of individual items and aspects of the accounts and records before us. We took the view by the end of the hearing that some items that were previously regarded by Mr Wood as being unproven or without adequate support had been shown to have some support. We therefore gave the appellants one month from the end of the hearing to produce to the Revenue a list of specific unverified receipts which the appellants felt had now been proven as individual receipts of individual partners and not as trading receipts of or derived from the partnership. We directed that the Revenue should have a fortnight in which to respond to that list, indicating agreement or disagreement with it. We would accept agreement between the parties as part of our decision, but would ourselves consider any matter submitted by the appellants and not agreed.

There was a little delay in getting the information exchanged as directed but that has now been done. In addition, the appellants perhaps took a wider view of what we had directed than the respondents. As only an oral direction was given on an assumed consent basis, we do not consider

anything turns on this, but we emphasise that this was not an opportunity for the appellants to produce new evidence. It was merely to allow the parties to see if they could reach further agreement on individual items put in evidence during the hearing.

We record that Mr Wood has accepted, and we therefore also accept, specific receipts by F of £2000 on 7.2.1995 and £7687.77 on 16.4.1996. The latter was the net proceeds from the sale of a property. N received payments of £440 rent on 13.4.1995 and 21.11.95, and £1117.83 as a reimbursement form the partnership on 19.10.995. S received £2000 from N on 9.2.1995. N was also accepted as having received sums totalling £1762.43 by way of wages (which we assume means drawings) and reimbursed expenditure between September 1993 and March 1995. This is a total of £15,448.003. In accepting this, we add the observation that it says little for the record keeping of any of the partners to date that it is only at the final moment that the substantial sum of £7687 is identified to be the proceeds of sale of a property of one of the partners in 1996 and therefore nothing to do with the partnership business.

Mr Kleyman had prepared much more detailed schedules, covering all unverified receipts from 20 August 1993. While that is useful as a final summary of the appellants' position, it is not what we directed and further appears to be based in part on records that, while they may have been in the bundles before us, were not the subject of specific reference during the hearing. We do not propose to take into account anything not expressly put in evidence before us at the hearing.

The value of the evidence

We have presented what we consider to be the relevant evidence given (save that from Mr Wood) to indicate both the strengths and weaknesses of the cases presented to us. With regard to the evidence given by the partners themselves, we formed the view that while they may have been successful and well trained restauranteurs, they seemed to show a somewhat surprising lack of competence about or indeed interest in the finances of their partnership. We would not, of course, expect all of them to show equal skill in or commitment to this side of the business, but we would expect, and did not find, that at least one of them had a firm grasp of the details of the business finances. This manifested itself in several ways. First, there seems to have been a remarkable lack of clarity about who paid what capital into the partnership. Even if we accept that all three partners were receiving funds from Iran which they had not earned, we would expect some tally to have been kept about who contributed what. Equally we would have expected a tally to have been kept about who took what drawings out of the partnership. In the beginning, it may be that the others had agreed to give N a "wage", so that they were paying in while he was contributing his time, but again if that was the arrangement we were not told about it.

Nor did the partners impress us by their varying accounts of whose responsibility it actually was to deal with the daily and weekly till and cash reconciliations and also keeping a check on the till and on payments in and out. We frankly do not believe that things would have been quite as relaxed and trusting as we were led to understand, even granted that the three partners were good friends who had also worked together and who were seeking together to free themselves from a common employer they clearly regarded with distrust. But precisely because of that background we would have expected a more positive approach to dealing with the accounts. Further, as the business evolved, the partners came increasingly to run the separate restaurants as separate though linked businesses. That would indicate to us that, at least by that stage, each should have gained appropriate accounting competence. We were equally not impressed by the way that there was a strong suggestion that it was Hendersons' fault that the records were as bad as they were. There were direct contradictions in the evidence about whether the till rolls were kept or not, and whether Hendersons had them. Whatever the truth of the matter, as we have noted, the till rolls are no longer available. There were also express contradictions about the quality of the till at Cheam and the extent to which anyone could register a "no sale" on the till. Finally, all three partners accepted under cross -examination that there were weaknesses in the accounts. But taking their answers together there was no consistent picture of where any responsibility for those weaknesses lay. Indeed, there were some recurring suggestions in the evidence that it tended to be the fault of someone other than the person giving that particular answer.

We also record that all three partners expressly accepted that the first accounts submitted by Hendersons were wrong, and that their own tax returns for those periods were also wrong.

We are therefore left with the conclusion that we do not accept the partners' evidence as a whole.

At the same time, we do accept that the cumulative evidence about transfers from abroad, and about the somewhat unusual measures taken to assist Mr Shah have an overall ring of truth. The trouble is, as the Revenue in our view rightly observed some time ago in correspondence, there is a difference between accepting that such remittances and transfers did happen and in determining that these are important explanations of the very extensive unverified bankings, in particular, in the year to August 1994. Even after the final opportunity was offered to the appellants at the hearing to show individual verification, we note that no individual payments were verified in this period. The only specific payments related to this period were Mr N's "wages" – which we also note were supposedly included (wrongly in terms of description) in the very first set of accounts submitted. And only one transfer from abroad was verified in the period – the sum paid to S.

We have, then, a picture of a business that was being run successfully in the commercial sense but which was being run at the best laxly and casually in financial terms. Further, that laxness or casualness applied also to the affairs of the partnership in which the three partners had joined. How far this was the fault of the partners, or of one of them, or of the accountants and others they employed to help and advise them, or their staff, can now only be a matter of conjecture. For current purposes, we must conclude that the Revenue was entirely correct in seeking to conduct a detailed investigation into this business on the grounds of inadequate initial accounts and returns.

Our conclusions

Does this justify adding £120,000 to the income of the year to August 1994, and similar sums to each of the later years? Aside from what we have formally recorded here we have considered at some length the large amount of material that was presented to us. Ultimately, however, no clearer picture emerges than the one we have recorded. We have noted that the Revenue now accept the explanations for a relatively small total sum that can be set off against this total, and that another small sum is verified as received from abroad. The main strength of the Revenue's case for the figures it seeks is that it is money received by the partners in at least some capacity in that period. In other words, and we so find, the sums listed as unverified bankings were received by the appellants from somewhere. The main weakness of the appellants case is that they cannot show more than in broad terms what other source than the partnership existed for most of those funds, and they also cannot produce a coherent and full set of accounts or business records for the period which explains at least a large part of those unverified bankings.

The appellants offered a number of explanations for the reasons why each of them had bankings before and during the period directly relevant to these assessments that, in their view, could be shown not to be business receipts. Of these, potentially the strongest was that of transfers of money from Iran. But we are left, after hearing the witnesses and seeing the available evidence, in considerable doubt about how much money actually arrived by that means in the relevant period. We heard of envelopes containing money being handed over, but no one could tell us of their precise content. Where someone did have some idea of what was being carried, the evidence suggested small envelopes of limited capacity, not big packages, and smaller denomination notes, not larger ones. We accept that in failing to take any account of oral evidence or documents such as the letters from the couriers that do not provide an audit trail, the Revenue may have been setting the burden of proof against the partners a little on the high side. Demanding documentary evidence of a transaction that is illegal under foreign law if not under United Kingdom law at that time (the money laundering rules would make a big difference now, we suspect), and that therefore is likely to have gone unrecorded, is asking for proof that both sides must have known did not exist and perhaps could not then have reasonably been expected. The weakness here is that these moneys were undoubtedly used at least in part as partnership capital, but there is also no record of partnership capital. And the Revenue were on stronger ground in asking for something to show that specific bankings could be tied to specific receipts from foreign sources. Only one such payment to one of the partners could be established in that detail in this period.

But we accept that this may have been a source for each of the three partners to some funds. We found the other reasons for failure to record reasons for individual bankings to be less convincing in both detail and in general terms.

Beyond that, we are thrown on to general estimates about levels of earnings from the business, drawn from such records as there are and from general business trends for that kind of trade. We have to say that the most convincing aspect of that general evidence is Mr Silk's comment on precisely how much extra custom would be needed in the average day and week to meet the turnover the Revenue is suggesting should be assumed as the basis for their view of the trading profits generated. We have reservations in finding that the business could be so consistently successful from its inception in that first year, particularly as it was a new business even if in a favoured location and run by experienced staff.

We recall that Mr Silk stated that there were still records and other evidence from which a full set of 1994 accounts could be reconstructed, but that he did not consider – in our words, not his – that it was worth the effort and cost. It is certainly, in our view, beyond the scope of this appeal for us to attempt anything approaching our own analysis of the dozens of lists of documents (let alone the thousands of documents themselves) presented to us as available.

Our decision must rest on the nature of the appeal before us. Our starting point is the assessment made by Mr Wood for the period to 31 August 1994 and subsequent periods. It is the first period of accounts of the partnership and as both sides accept the then standard "first year rules" apply to it. The burden of proof is on the appellants to show why the assessment made against them should not stand good. The standard of proof required is that of the balance of probabilities. If the appellants cannot meet that test, then the assessments will remain in effect. And while we considered all the evidence before us in the way indicated, we do not accept Mr. Argles' argument that the appellants and those now working for them had discharged the burden of proof merely by producing a series of boxes that we are prepared to accept contain all the documentation now available about the finances of that period.

The central issue in this case is much the same as that in the oft-cited decision of Walton J in Jonas v Bamford [1973] STC 519. In that case the taxpayer was faced with the task of showing that the Inland Revenue was wrong in raising additional assessments against him under Schedule E for sums received by him during a series of tax years. There was also in that case a failure to disclose information. The appellants in this case have been more cooperative, but the resulting problem is much the same: the taxpayers have clearly received sums of money, and have not adequately explained where they came from. As Walton J put it:

"In the end, this case is one which falls to be decided almost exclusively on the question of onus…

"At the end of the day, I should have been more than willing to follow counsel for the taxpayer through all the figures if there had been anything concrete on which to bit; but there was not, and at the end of the whole of counsel's financial wizardry the simple fact remains that he has not discharged the onus which lay on the taxpayer of showing that the additional assessment was wrong."

In this case the onus was on the appellants to show why the Revenue was wrong in assessing the unverified banking receipts for the periods in question as income from the only major identifiable source, namely Schedule D partnership income from their restaurant business. And at the end of the day we are a little nearer resolving the uncertainties, but not much nearer.

Having considered all the evidence and submissions, including those made for the appellants and accepted by the Inland Revenue after the hearing before us, we conclude that neither party could establish "the" answer to the problem of the extent to which the accounts were faulty, even to the standard of probabilities. We think those items accepted by the Revenue after the hearing take to the limit the extent of the individual unexplained bankings for which there is sufficient documentary evidence to establish an adequate audit trail. But we accept, to an extent, that there were some other bankings of which there is now no proper record but for which some allowance should be made as against the total on which the assessments were based by Mr Wood. Beyond that we must rest our decision on the same basis as that in Jonas v Bamford. The appellants have been given full opportunities to show why the assessments were wrong, and they have largely been unable to do so satisfactorily.

We consider that, on balance, the assessment for the period to 31 August 1994 should be reduced from £120,000 to £80,000. That takes account of the further items now accepted by Mr Wood and therefore by us. It also takes account of a reasonable further sum that we are prepared to accept on the basis of the oral evidence before us is an appropriate amount to reflect remittances to the individual partners from abroad during the period. But it also recognises that the partners both individually and together signally failed to satisfy us about their individual or partnership record keeping, about the ratio of cash transactions to credit card transactions in the partnership business, or in relation to the other explanations offered to deal with issues on which we consider that the Inland Revenue were justified in mounting a challenge. The only other limiting factor to be put against the Revenue's case is that we accept to an extent the analysis by Mr Silk of the practicality of earning the undeclared additional profits. We must inevitably deal in round figures at this stage, and we feel a reduction of £40,000 is as near as we are going to get ten years after the events to an appropriate sum to reflect those specific items and other factors.

We therefore find that the amount to be added as additional sales for each of the years to August 1994, 1995 and 1996 is £80,000 in place of the £120,000 in the figures presented in Mr Wood's Schedule G, with an assessment to be based on the appropriate adjustments to those figures for each of the tax years 1993/94, 1994/95 and 1995/96. For 1996/97 we find that the adjustment should be to the same effect, on the grounds of continuity, and that Schedule L to Mr Wood's should be adjusted accordingly and an appropriate assessment made. We decide accordingly. If the parties are unable to agree the precise figures, then they are at liberty to come back to us to ask for a final decision.

We also record that this case is one that could in our view have been settled under the usual section 54 procedure, rather than fought out at length but inconclusively before us. It is a pity that neither side was able to move the other sufficiently towards an agreement.

The application of penalties

At the end of the hearing Mr Williams asked us to reflect on the application of penalties to these assessments. We think that the starting point of any consideration of penalties is to note the effect of this decision. Because of the first year rules, and because interest will be payable, the total sums to be paid under these assessments by the three partners will be considerable. Indeed, some might say that the inevitable operation of the law on the assessments we have made will of itself impose a penalty and perhaps a sufficient penalty on these three partners and their businesses.

We say that because we are not satisfied from what we have seen and heard that we should infer that the case necessarily arises from fraud or a pattern of deliberate concealment but may rather be one of incompetence and failure to keep proper and timely records. We note, for example, from the evidence that there were more than one VAT visit to the premises. But no evidence was offered from the visiting officers. Mr Williams said that Customs and Excise officers would have been concerned to check different matters to the Inland Revenue. While that may be correct to an extent, Customs and Excise officers would be equally concerned with under-recording of takings of the scale that the Inland Revenue has alleged. HM Customs and Excise can be expected to pay close attention to restaurant businesses such as this and to matters such as till rolls. An accountant was appointed at a relatively early date, and the appointment was changed, and then changed again, as the enquiry went on. Some records were kept, and – at least by the stage it came before us – if the records continued to exist then we are satisfied that the accountant currently acting ensured that the Inland Revenue saw them.

But at the same time we do not accept that any of the partners can show a good reason why any responsibility for the general incompetence in the approach to accounts and taxation by the partnership can be passed from one to another. All the partners were aware from their previous employments before the partnership started of the need to pay attention to funding and cash flows and also, on the evidence we heard, of the problems that occur if there is a failure in looking after business receipts and outgoings properly. The evidence showed that at first the talents of the partners were fully pooled. But as the business expanded each of the partners took charge of the whole of the business of one of the restaurants. That must and did include responsibility for the receipts and outgoings, and must and did include responsibility for record keeping for both VAT and income tax. We think any further consideration of penalties by the Inland Revenue should properly have all those points in mind.

M GAMMIE QC

DR DAVID WILLIAMS

SPECIAL COMMISSIONERS

RELEASED 21/06/2004