United Kingdom VAT & Duties Tribunals Decisions

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Cheung v Customs & Excise [2003] UKVAT V18269 (08 August 2003)

ASSESSMENT — some undeclared sales conceded by the Appellant – methodology of assessing officer and amount of tax due disputed – Sunday not a weekday but part of weekend – appeal allowed in part on this aspect only

MANCHESTER TRIBUNAL CENTRE

KWOK KEUNG CHEUNG Appellant

- and -

THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents

Tribunal: Mrs E Gilliland (Chairman)

Mr P J Seward

Sitting in public at Birmingham on 15 May 2003.

Mr A Cash, solicitor, for the Appellant

Mr J Cannan of counsel instructed by the Solicitors Office of HM Customs and Excise for the Respondent.

DECISION

This is an appeal by Kwok Keung Cheung (the Appellant) against an assessment to value added tax raised by the Commissioners on 9 November 2001 in respect of the accounting periods 11/98 to 08/01 inclusive in the sum of £20,502.00 plus interest. The assessment was raised under Section 73 of the Value Added Tax Act 1994 (the Act). It has been conceded on the Appellant's behalf by Mr. Cash who has presented the Appellant's case that certain sales were not accounted for by the Appellant and that accordingly tax has been undeclared. What is in dispute however, is the amount of tax due and this has put by the Appellant's representative at £3,600 approximately arising from sales not declared of some £25,000. In his Notice of Appeal to the tribunal dated 5 June 2002 and also at today's hearing, the Appellant has objected to the methodology of the assessing officer of the Commissioners on the basis that he has calculated the figures using incorrect assumptions as to sales and without independent evidence in respect of recent purchases. Written closing submissions have been allowed which have been received from the parties since the hearing date.

The Appellant is the proprietor of a Chinese Takeaway business which is operated from premises at Orient House, 39 High Street, Sileby, Leicester. He was registered for VAT purposes with effect from 7 February 1990. The Appellant is principally in the kitchen and is responsible for the day to day administration. Officers of the Commissioners carried out a series of observations and test purchases at the premises. These took place on Friday 16 February 2001 (test purchases) ; Friday 30 March 2001 (test purchases and observations) ; Thursday 2 August 2001 (test purchases and observations). Finally on Friday 31 August 2001 there were further test purchases but at the close of trading two officers, Mr J D Cook, the assessing officer who has given evidence to the tribunal, and Mr D A Talbot, entered the premises and carried out a cashing up exercise. They took with them when they left bills and till rolls. The Appellant also gave them the account book. He was given a receipt. The Appellant has said that he used the till rolls as the basis of his VAT returns.

In his evidence to the Tribunal Mr. Cook has said that in connection with the Appellant's business he was seeking to gauge the level of trade by the bill numbers used, to establish the bill number system, and at a later date to check if sales were declared. The information which he had gleaned in relation to the first test purchases on Friday 16 February 2001 was that there had been declared the sum of £433.15 in respect of 40 transactions. There had been 5 test purchases but only 3 were found in the records declared. The officers had also overheard 5 orders given by members of the public of which 2 could be identified in the Appellant's records.

In relation to the second test purchases on Friday 30 March 2001 the sum declared by the Appellant in respect of the evening's takings was £499.30 from 44 caller and delivery sales. There had been 4 test purchases by officers of which 3 had been entered in the records and there had been 6 overheard transactions of which 3 had been found in the records. The recorded observations of the officers showed 47 caller sales (including the officers' 4 test purchases) plus 13 delivery trips. Mr. Cook used a multiplier of 1.25 on deliveries and calculated therefore 16 sales on these making a total of 63 sales of which he considered 19 had been omitted.

The third test purchase took place on Thursday 2 August 2001. The takings declared were £205.65 from 20 transactions. There were 5 test purchases of which 2 could be traced in the records and 4 overheard transactions of which 2 had been declared. The observations showed 30 caller sales (including the officers) and 4 delivery trips which, using the multiplier Mr. Cook calculated as 5 sales making a total of 35.

The cashing up exercise on Friday 31 August 2001 was intended to establish the takings for that night, to establish whether trade was normal, and to confirm that the meal bills were all for that night. The day's gross figure was agreed with the Appellant to be £794.35 (with the officers' 4 purchases excluded) arising from 71 sales. There had been 53 callers and 22 deliveries. The Appellant has accepted the figure of £794.35. The transaction log showed £731.40. The previous highest declared takings for a Friday evening (excluding Christmas) had been £578.70 on 20 April 2001.

Reviewing the position on Fridays between 4 February 2000 and 31 August 2001, Mr. Cook established that the previous highest recorded sales were on 22 December 2000 at £609.00 and, as referred to, 20 April 2001 at £578.70. The assumption was made by Mr. Cook that the difference between the sales on 31 August 2001, a known figure, and the previous highest Friday declaration should represent undeclared sales. The figure of £578.70 was compared with the gross takings of £794.35 on 31 August 2001 and this showed that the declared total had been only 72.84% of the actual sales on 20 April 2001. Mr. Cook also noted that returns for the periods May 1998 to August 2001 had shown a relatively consistent level of declared sales but that declared sales had increased substantially for periods from 31 August 2001.

Mr. Cook's method of assessment was to take the percentage for declared sales at 73% as shown and this he considered was consistent with the observations made on 30 March where the calculation placed the true sales to declared sales at 71.87%. In respect of weekday sales, using the observations on Thursday 2 August 2001 Mr. Cook estimated that only 59% of the sales had been declared. Weekend sales comprised 60% of total sales and weekday sales 40%. Using these figures for the period 11/98, expected sales were £35,721.00 of which £23,803.00 only (67%) had been declared. This percentage of sales declared to estimated sales was applied to the VAT returns for the periods 11/98 to 8/01 to produce the Commissioners' figure of £20,502.00 for outstanding VAT. The assumption made by Mr. Cook he found consistent with observation evidence for Friday 30 March 2001 and test purchase evidence.

The onus is on the Appellant to satisfy the tribunal that the assessments were not arrived at to best judgment and on the balance of probabilities that the assessments are excessive. The tribunal has before it the decisions in Van Boeckel v Customs & Excise Commissioners [1981] STC 290, Rahman v Customs & Excise Commissioners [1998] STC 826, and the decision of the Court of Appeal in Rahman v Customs & Excise Commissioners (No..2) [2002] EWCA 1881. In Rahman No.2 the Court of Appeal considered further the nature of an appeal under Section 83(p) of the Act, the relevant section in the matter before the tribunal. It is established law that an assessment must not have been reached "dishonestly or vindictively or capriciously" nor be a "spurious estimate" or guess in which all the elements of judgment are missing or be "wholly unreasonable". (Van Boeckel). In Rahman No.2 Chadwick L.J. stated (paragraphs 44 and 45):

"In the usual case the tribunal will have the material before it from which it can see why the Commissioners made the assessment which they did; and have further material which was not available to the commissioners when the assessment was made. In such cases, as it seems to me, a tribunal would be well advised to concentrate on the question "what amount of tax is properly due from the tax payer?" Taking the material before it as a whole and applying its own judgment. If that leads to the conclusion that the amount of tax properly due is close to the amount of the assessment, the tribunal may well take the view that it would be a sterile exercise to consider whether the commissioners exercised best judgment in making their assessment. The tribunal has power on an appeal against a decision with respect to any of the matters mentioned in section 83(p) [of the Act] to give a direction specifying the correct amount of the tax due; and where such a direction is given the assessment has effect as an assessment of the amount specified in the direction – section 84(5) of the Act.

It is in cases where the amount of the tax found by the tribunal to be properly due is substantially different from the amount assessed by the commissioners that the tribunal may think it appropriate to investigate why there is a difference; and to seek an explanation. That investigation may - but often (as in the present case) will not - lead to the conclusion that the commissioners did not exercise best judgment in making their assessment. The tribunal may take the view, in such cases, that the proper course is to discharge the assessment. But even in cases of that nature as it seems to me, the tribunal could choose to give a direction specifying the correct amount – with the consequence that the assessment would have effect pursuant to section 84(5) of [the Act]. It could not be criticised for doing so. The underlying purpose of the legislative provisions is to ensure that the taxable person accounts for the correct amount of tax".

It has not been alleged by the Appellant that the assessment was not made to best judgment and it is clear to us that there was no improper motive or unreasonableness in the procedures followed by the Commissioners nor in the decision to assess. Whilst accepting that there has been an under-declaration of tax – and for this he can give no explanation – the amount which the Appellant considers is properly payable is "substantially different" from the amount assessed by the Commissioners. However the true issue is what is the correct amount of the tax properly payable. The submissions which have been made on behalf of the Appellant to refute the inferences which have been made by the Commissioners are as follows:- that the Commissioners have incorrectly included Sundays as a "weekday" rather than as part of the "weekend"; that in their calculations the Commissioners have ignored price increases during the period under assessment; that insufficient weight has been given to the clear evidence of the Appellant on the effect on his trade of housing estates opening near his business together with his own efforts with publicity and a new menu to increase his trade towards the end of the assessed trading period in August 2001; that the Appellant did not on 31 August 2001 make any comment to the assessing officer and his colleague that trade was "normal" for that night; that "batching" of transactions took place which was not taken into account in the figures; that it is an unreasonable and incorrect assumption that items being delivered should be calculated not as single and individual sales but should be subject to a multiplier of 1.25; that there were no stock purchase omissions from the records and no improper transaction with the supplier Sun Yip Limited and that there was no admissible evidence before the tribunal to establish the same; that the acknowledged increase in trade on 31 August 2001 and its continuation from then shows that the Appellant's strategies began to have effect rather than established that there had been mis-declarations.

Dealing with these points, we would begin with the basis of the assessment. We are satisfied with and accept the evidence of Mr. Cook, the assessing officer, supported by the witness statements as to the observations and test purchases. It is however unreasonable in our view to treat Sunday as a weekday rather than as a weekend trading day. In connection with weekend sales and weekday sales the Commissioners established that the greater proportion of undeclared sales arose on weekdays and the split of 60% and 40% between total weekend and weekday sales does not appear to have been disputed by the Appellant. We are satisfied that the basis of calculation to establish that division is appropriate. In our opinion however to view Sunday as a weekday is unjustified and no plausible explanation has been put forward by the Commissioners as to why it has been taken on this basis. The assessments must be adjusted accordingly. Mr. Cook had supplied the adjusted figure to us and this will reduce the assessment to £19,123.00.

The Appellant submitted that there had had been price increases during the accounting period and that these had not been provided for in the assessment. It was acknowledged by the Commissioners that there had been price increases but the evidence of Mr. Cook which we accept was that the methodology took these into account as the percentage applied is of under-declared to actual declarations and the actual declarations will relate to the prices prevailing at the time of those transactions.

We cannot accept that the new menu, however competitively priced, is the explanation for the substantial increase in sales on 31 August 2001 which it would appear to be accepted has been reflected in a continuing trend. Similarly we cannot accept that the delivery from time to time of menu cards to new housing estates would have such an effect on one night of business. Nor are we satisfied that there would be a substantial increase in customers from new housing estates. There is a conflict between the Appellant's evidence and that of the assessing officer as to how many of the new houses were occupied at the relevant time. Further although Mr. Cook's evidence was that the Appellant had said that he had been adversely affected by the establishment of a third Chinese take away in the immediate area the Appellant disputed that he had said it. We accept Mr. Cook's evidence.

The Appellant has denied that he said anything to the assessing officer on 31 August 2001 to the effect that it had been a "normal" nights trading but that sales had fluctuated due to increased competition. He has supported this by saying that there was no reference in the witness statement of Mr. Talbot corroborating this evidence. However we prefer the evidence of Mr. Cook. He has recorded it in his written statement and he has confirmed it in his sworn testimony before the tribunal. Mr. Cook was in our view a credible and reliable witness. Mr. Talbot's witness statement was restricted to the test purchases which he had undertaken on the relevant evenings including 31 August 2001. Her did not refer to the cashing up exercise though it is quite clear and was not disputed that he was the officer attending with Mr. Cook on that evening.

The Appellant has contested the assumption that deliveries were not individually made and that it was appropriate to apply a multiplier of 1.25. The Appellant has said in evidence that he did weekday deliveries and had part time delivery staff at the weekends, although he helped out also. Mr. Cook quoted instances where the delivery was taken in more than one bag and the delivery person was absent for some time. We have noted the evidence of the Appellant that customers would complain if the meal were not delivered immediately on being cooked. However the radius of delivery was small ( the Appellant said some 5 miles) and it is not plausible that deliveries would not be doubled up where it was convenient to do so. It appears to us that this is the only reasonable explanation for the circumstances where several bags were carried out without one very large order being tilled up and also an explanation for "batching" of delivery sales

On the issue of test purchases which for instance had not been identified in the declared takings, (even though on occasion it appeared the till had been opened) the Appellant has said that the till transaction listing included transactions which had been totalled together or "batched" and that this was why single transactions could not be identified. The Commissioners have submitted that the only evidence of batching is in relation to delivery sales on 31 August 2001 and that there is no evidence of any caller sales being batched. On 31 August 2001 there were 22 delivery transactions and 13 were batched. The fact that there was some batching however would not mean that all sales were in fact declared or that the unrecorded test purchases and the unrecorded overheard transactions were batched. In our view the observation exercises were not the subject of batching. Further it has to be remembered that the Appellant has already acknowledged that there has been an under-declaration.

In his oral testimony Mr. Cook has confirmed discussing billing procedure with the proprietor at Sun Yip Supermarket. He has suggested that because wholesalers have a low profit margin of 5% to 6% they keep particularly tight procedures in place. Drivers delivering from the supplier to a customer would collect money for that or a previous debt. Mr. Cook pointed out that there were some cash sales not paid on the day and so it was necessary for the supplier to identify who the debtor was. He had done an appropriate analysis at the time of the assessment working from the suppliers invoices but he had not used it in the assessment and had worked instead solely on the basis of the sales declared. When cross-examined by Mr.Cash as to the evidence there was as to any cash purchases being omitted from the records, Mr. Cook had difficulty in explaining the suppliers lists. Accordingly the Appellant queried the accuracy of the suppliers records. It is clear to us from the suppliers lists in the bundle and the apparent two tier system of dealing with purchases that further evidence would be necessary to follow this through. However we are satisfied that the purchase invoices have not been used as the basis of the calculation of the assessment and they have not been taken into account by us in reaching our decision.

The Appellant has submitted that the increase in sales on Friday 31 August 2001 as against Friday 30 March 2001 should not be introduced as a figure in the assessment as it was a genuine increase in business. Mr. Cook said that there were 59 sale transactions on Friday 30 March 2001 but this was disputed by the Appellant with a substituted figure of 56 (excluding the test purchases) put forward. Excluding the test purchases there were 71 sales transactions on Friday 31 August 2001. The increase of 15 sales, the Appellant has contended, shows an increase in business of £167.70 (using the Commissioners average meal price of £11.18) and if that were deducted from the 31 August total and applied to the previous highest figure of £578.70, it would show that 92% of true takings had been declared. Using the declared turnover during the assessment period this would show that under-declared sales were £24,276 and thus the VAT unpaid was £3,616.

We cannot accept this computation. The figures on 31 August 2001 are a known figure taken from the meal bills whereas those of 30 March 2001 were observed only with the Appellant given the benefit of any doubt in the context of the observations. Those figures were estimated rather than true figures. Further the observation evidence on 30 March 2001 suggested that only 71.87% of sales have been declared when compared with the takings records. The observation evidence from the observations on 2 August 2001 suggests that 58.85% of sales only had been declared when compared with the takings records. We accept and find that the information obtained by the officers on 31 August was correct as to the amount of the takings and of the records that night. Whilst we accept that the Appellant has said that he had not been able to do a reconciliation on that night, nevertheless we are not able to establish from the evidence he has given to us that such a reconciliation exercise would have altered the figures.

The appeal is allowed only to the limited extent that we require an adjustment between the weekend and the weekday sales split to identify Sunday as weekend rather than a weekday. These calculations have been provided by the Commissioners and we therefore reduce the assessment to £19,123.00 which we are satisfied is the correct amount of tax payable.

On the question of costs, the Appellant has been successful only to a very limited extent and the Commissioners have been successful in maintaining the validity of their calculations save on the point as to Sundays. The Commissioners have not themselves sought costs. Although minded to make no direction as to costs, since we have not had full submissions in relation to our conclusions we give liberty to both parties to apply on the issue of costs.

Mrs E Gilliland

Chairman

Release date:

MAN/02/0410