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Pars & Ors (t/a De-Niros) v Customs and Excise [2004] UKVAT V18674 (30 June 2004)

VALUE ADDED TAX — assessment — take-away restaurant — delivery service — observations of customers — cashing-up exercise — whether suppression of sales demonstrated — yes— whether apparent discrepancies accounted for by advertising exercise — no — assessment reduced in part

VALUE ADDED TAX— penalty for dishonest evasion — whether sales suppressed — yes — whether dishonesty established — yes — penalty reduced to reflect reduction in assessment — mitigation— no additional reduction

MANCHESTER TRIBUNAL CENTRE

ADHIDE PARS, RADHI AL-MUSAWE Appellant

& ZAHAA REDHA t/a DE-NIRO'S

- and -

THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents

Tribunal: Colin Bishopp (Chairman)

Hon Mrs A Widdows

Mr C B H Gill

Sitting in public in Manchester on 15 and 16 June 2004

Richard Barlow, of counsel, instructed by IVC, for the appellants

Nigel Poole, of counsel, instructed by the Solicitor's Office for Customs and Excise, for the respondents

DECISION

The appellants carry on business in partnership under the name "De-Niro's" from premises in Ossett, West Yorkshire. They sell takeaway food, mainly pizzas although their menu lists several other items, and also offer a delivery service. The Commissioners believe that they have concealed the amount of their takings and have correspondingly under-declared their output tax liabilities. Relying on that belief the Commissioners issued an assessment, dated 8 March 2000, in the aggregate sum of £48,595, spread over each of the accounting periods from 04/97 to 01/99. The amount assessed was later reduced, on reconsideration, to £42,172.

The Commissioners also maintain that the under-declaration constituted a dishonest attempt to evade the payment of tax, and they have imposed a penalty on the partners, in accordance with section 60 of the Value Added Tax Act 1994, in the total sum of £32,283. The penalty has been imposed for only part of the period covered by the assessment, and it is equivalent to 90% of the tax which the Commissioners consider was evaded for that period. They have mitigated the maximum 100% penalty by 10% because the partners attended an interview and provided some records.

The appellants now challenge both the assessment and the penalty. They deny that they have under-declared their tax liability; on the contrary, they say, their declarations are accurate. They contend that, since there was no under-declaration, there can have been no possible dishonest evasion. They do not advance an alternative case that, if we should find some under-declaration, there is an honest explanation for it although, even so, they do not concede dishonesty in such circumstances.

The appellants were represented by Richard Barlow of counsel and the respondents by Nigel Poole, also of counsel. Since this was a penalty appeal Mr Poole went first and we heard evidence from five Customs officers who had taken part in the events leading up to the making of the assessment and the imposition of the penalty, Tracey Dearnley, Judith Ward, Julie Hardwick, Adam Bryn-Jones and Ruth Ross, as well as a former Customs officer, Suzanne Brennan. We heard evidence from each of the appellants; Mr Barlow called no other witnesses.

The events with which we are concerned began on 24 November 1998 when (for reasons which were not explained to us) covert observations were carried out on the entrance to the appellants' premises in order to determine the numbers of customers who called to make purchases, and the number of deliveries made to customers. Similar observations were carried out on 4 December 1998. As is usual in such cases, the observations were undertaken by teams of two officers – in this case varying combinations of Mrs Dearnley, Miss Ward, Mrs Hardwick and Mr Bryn-Jones – who were stationed in premises on the opposite side of the fairly narrow street in which the appellants' shop is situated, about 15 metres away from its entrance. The shop is in a pedestrian precinct and although a few private cars might enter it (including the cars used by the appellants' delivery drivers) we are satisfied from the evidence, including some photographs, that the officers had an unobstructed view of the entrance to the shop and were in a position to undertake accurate observations. We had copies of the observation logs prepared by the officers. Mr Barlow tested their reliability in cross-examination of those officers but we are satisfied that they compiled the records with care and that they are as reliable a record of what the officers saw as human fallibility allows.

On 19 March 1999 Mrs Dearnley and Miss Ward made an unannounced visit to the appellants' shop at 11.52 pm, shortly before they expected it to close for the night. The purpose of their visit was to observe the cashing up of the day's takings and to collect such accounting records as were available. Only one of the partners, Mr Redha, was on the premises at the time. He was, as the officers confirmed, entirely cooperative. He allowed them to watch the counting of the cash in the till and the taking of a Z-reading, which was for £498.60. Mr Redha handed over from his pocket in which they had been kept copies of the slips which had been used during the course of the day's trading to record delivery orders together with the cash (including two cheques) relating to those orders. There was a slight discrepancy between the total of the slips, which came to £319.40, and the cash in Mr Redha's pocket of £318.30, but it was nevertheless apparent that the two were related; the appellants have not suggested otherwise. The total takings for the day, including the cash in Mr Redha's pocket rather than the aggregate value of the meal slips, amounted to £816.90.

Mrs Dearnley told us she understood Mr Redha to have said to her that the value of the delivery orders was not rung into the till and that it was the amount shown on the Z-reading – and therefore only the value of the shop sales – which later found its way to the daily gross takings records. Mr Barlow suggested to her that this was not what Mr Redha had said and that her notebook (from which, after such a lapse of time, Mrs Dearnley needed to refresh her memory) did not support that version of the conversation. We shall return to this dispute at a later stage. The daily and other accounting records were not on the premises at the time of this visit and Mrs Dearnley asked Mr Redha to produce them the following day, and also to ensure that in future details were kept, on a daily basis, of the number of deliveries made, their aggregate value, and the aggregate value of the shop sales. The records Mrs Dearnley had requested were subsequently provided to her, and the appellants did keep the daily details she requested from 22 March 1999 to 26 May 1999, when they too were collected.

The observation records show (as the appellants were to confirm when they gave their evidence) that food ordered for delivery was placed into large red pouches which were designed to keep the food hot while it was being transported from the shop to the customers. The deliveries were made by car drivers, casually employed by the appellants, who carried the food out of the shop in the red pouches, placed it in their cars and then drove it to the customer's home before returning with the payment. When she analysed the observation logs in order to determine the numbers of deliveries and of shop sales, Mrs Dearnley took the view that each pouch observed to have been carried out of the shop represented one delivery – so that, if a driver left with two pouches, she assumed in her calculations that he was making two separate deliveries to customers who lived reasonably close to each other, or in circumstances when for some other reason it was convenient for the driver to make two deliveries in one trip. She suspected that on occasion two deliveries would be contained in one pouch but she left that suspicion out of account. When the appellants gave their evidence, they accepted that from time to time two deliveries would be made in one trip, though they also made the point that it would on other occasions be necessary to use two pouches to accommodate all of a large order; and they said that they would never use one pouch for two separate deliveries as there was always a risk that the driver would confuse one customer's order with the other's. Occasionally, they said, a driver would have to make two trips to the same customer because a mistake had been made in his order, and he insisted on a correction. Mrs Dearnley determined the number of shop sales by noting the number of persons, other than staff members or delivery drivers, leaving the premises with pizza boxes, carrier bags and similar receptacles.

The appellants' daily gross takings were recorded in small blue notebooks. Two such notebooks were handed to Mrs Dearnley, following her request for the accounting records, and were produced at the hearing. One covers the period from 10 February 1997 to 8 November 1998 and the other, overlapping slightly, the period from 2 November 1998 to 14 March 1999. The records are kept on a week by week basis, the left hand of each pair of open pages listing the gross takings for each day of the week, starting on Monday and finishing on Sunday (the shop is open seven days a week), and the right hand page setting out details of the expenditure incurred during the week. The expenditure records are kept in a most unconventional fashion and are initially quite difficult to understand (though they make some sense when explained), but the takings records are simple, showing a single gross figure for each day of the week, with a weekly total. In the event, only the takings records are material to the appeal.

The appellants' case is that the recorded takings figure is the aggregate of the Z-reading, representing the shop sales, and the total of the sums shown on the delivery tickets, representing the delivery sales. The delivery sales were not rung into the till, as Mr Redha had told Mrs Dearnley on March 1999, but their value was determined by adding up the values on the delivery tickets, using a calculator; the total value so found was then written on the back of the Z-reading, and added to the amount of the Z-reading to achieve a daily gross takings figure. That was the figure entered, day by day, in the blue record books.

The recorded sales on 24 November 1998, a Tuesday, were £138. If, as Mrs Dearnley calculated, there were 50 sales on that day (21 deliveries and 29 shop sales) the average sale had a value of £2.76, which she considered to be unrealistically low. On 4 December, a Friday, there were on her estimation 162 sales (62 deliveries and 100 shop sales). The recorded takings were £452.20, representing an average sale value of £2.79. The takings on the day of her unannounced visit (when no observations were undertaken), amounted in all to £816.90. That (as the appellants conceded) is about £300 greater than the highest amount recorded on any day on or before 31 January 1999, the last day included in the appellants' most recent VAT return, rendered a few weeks before the visit. The blue account books, however, showed that conspicuously higher sums were recorded in the weeks after 31 January 1999, including £825 on Saturday 13 March, the highest recorded amount for any day.

Mrs Dearnley came to the conclusion that the figures recorded in the book for days after 31 January were unreliable and had been made up, or altered, in the short interval between her visit to the shop and their being handed over to her. It is certainly true to say that there are several amendments to the figures – and a good deal more than are apparent from the records relating to earlier periods, which show very few amendments indeed. However, as Mr Barlow pointed out, one amendment appears to have been made in order to reduce the recorded figure from £825 to £725 and Mr Poole did not pursue the argument that the book had been falsified before being handed over to Mrs Dearnley.

On 8 July 1999 Mrs Dearnley, accompanied by another Customs officer who did not give evidence, undertook an interview with all three of the appellants at their accountant's office; the accountant, Mr A Ghafoor, and one of his colleagues, Mr A Ditta, were also present. Little turns on the interview, save that it was then that the appellants explained their system for dealing with deliveries and for calculating their takings. There was some dispute about precisely what was said at the interview. There were some differences of recollection, and some ambiguity about what Mrs Dearnley had recorded; and it later became clear to us that there were also some inconsistencies of detail between the three appellants. Most of these differences are, we think, of no real relevance.

What was clear – and was confirmed when the appellants gave their evidence – was that during the course of each trading session, shop sales (by which we mean sales paid for by the customer within the shop) were kept separate from delivery sales, for which payment was collected by the delivery driver from the customer at his or her home. That, of course, coincides with what Mr Redha told Mrs Dearnley on 19 March. Shop sales were rung into the till, into which the payment was also placed. Sometimes a customer would come into the shop to place an order for food to be delivered later but would pay for the food there and then. In such a case, the transaction was treated as a shop sale and the customer's address and the required time of delivery were written on the back of the till slip (which recorded the details of the order). The till slip was passed to the kitchen in order that the food might be prepared at the appropriate time, and then given, with the food, to the delivery driver in order that he could make the delivery. In the more usual case where a customer ordered a delivery by telephone, his order was recorded in a duplicate book. The person taking the order wrote down the customer's address and details of the items ordered and their respective prices, with the total value. The top copy of the order was passed to the kitchen for the food to be prepared and then handed with the food to the delivery driver who took the food to the customer's home and collected the appropriate payment. On his return, the duplicate copy of the order was taken out of the book and kept with the money collected by the delivery driver, in a pocket of Mr Redha's or Mr al-Musawe's clothing, depending upon which of them was working in the shop at the time. At the end of the day's trade, the aggregate value of the delivery orders was added to the Z-reading of shop sales, as we have described.

The appellants' evidence was that Mr Redha and Mr Al-Musawe worked at the shop while Mr Pars did not, since he had another shop of his own elsewhere. He was little more than a sleeping partner in this business, although it was he who was responsible for the record keeping. Either Mr Redha or Mr Al-Musawe, on his way home after the day's trade, would take the Z-reading and the day's takings, apart from any amount which had been expended in cash, to Mr Pars at his other shop, which remained open rather longer than this shop. Mr Pars told us that he recorded the day's takings, each day, in the notebooks; we think, as he almost conceded, that he was not quite so punctilious and that he would quite often make up two or three days at a time. Nevertheless we accept that he made up the records reasonably promptly.

While we can understand the need to make two copies of a telephone order for delivery, the one to enable to driver to go to the right address and to collect the correct money and the other to enable the staff in the shop to verify that the order had been delivered and payment obtained, we were unable to understand from the appellants' evidence why the money was thereafter kept separate from the shop takings. There was no apparent reason why payments, when received from the delivery driver, could not be rung into the till. Even if there was perceived to be some need to keep the two categories of payment separate during the period when the shop was open (though none was identified to us), there was no evident reason why the amounts on the delivery slips could not be rung into the till at closing time and a single Z-reading taken for the aggregate of shop and delivery sales. The appellants did not keep separate records of their shop and delivery sales, for monitoring or any other purpose. The only historical record kept – that in the blue record books – was of aggregate takings. It was suggested that the till was operated by a person who would not also be able to ring in delivery sales, but we confess that we found that explanation incomprehensible. It is, also, difficult to reconcile with the appellants' evidence that on occasion they had to open the till to give correct change to a delivery driver. The (only slightly) better explanation was that it was a system the partners had been using for some time, and they had not thought to change it. We find that explanation, too, unconvincing. Perhaps a little less importantly, we did not understand the need to tear the second copy of each delivery slip from the book; a simple mark on the slip to indicate that the order had been delivered and paid for would be sufficient.

The fact that the two categories of takings were kept separate led the Commissioners to the view that the appellants were declaring the shop sales and suppressing the delivery sales. That suspicion was fortified by what Mrs Dearnley thought Mr Redha had said to her when she observed the cashing up – that is, as we have mentioned, that shop sales only were declared. The Commissioners' statement of case contains the allegation "when viewed as a whole the proper construction of the evidence is that delivery sales were not declared by the appellants at all". However, at the conclusion of the evidence Mr Poole abandoned that allegation, and we think he was right to do so. We have concluded that there was a misunderstanding between Mrs Dearnley and Mr Redha, though whether Mr Redha misunderstood the question or Mrs Dearnley misunderstood the answer is not clear and is not a matter which we need to decide. We are satisfied that the question and answer, taken together, did not amount to an admission by Mr Redha that only the shop sales were declared on the appellants' VAT returns. We think he meant no more than that the Z-reading did not include delivery sales. In any event, the contention that the shop sales were declared and the delivery sales were not is inconsistent with the manner in which the assessment has been calculated, which is not dependent upon that apparent concession. Moreover, if the assessment is correct, the scale of the suppression exceeds the value of the delivery sales.

Shortly after the interview on 8 July 1999, Mrs Dearnley moved to a different department, and the case was allocated instead to Mrs Brennan. She had not hitherto been involved in the investigations. At about the same time, for reasons which were not explained to us, Mrs Ross also became involved; her role was to consider whether or not there was evidence justifying the imposition of a penalty.

On 8 December 1999 the three appellants were interviewed again, on this occasion by Mrs Ross and Mrs Brennan; Mr Ghafoor and Mr Ditta were also present. At the beginning of the interview the appellants were shown the Commissioners' Notice 730, which explains that the Commissioners are in the process of investigating the possibility that there has been dishonest evasion of tax, and states that mitigation of the penalty which will be imposed if dishonesty is established can be earned by cooperation.

Before the interview Mrs Brennan had prepared some calculations, to which we will return in more detail shortly. The calculations, and the conclusions she had drawn from them, were put to the appellants during the course of the interview. They maintained throughout that the declarations they had made, in their VAT returns, of their liabilities were correct. They explained that their sales had increased, from the level recorded in the autumn of 1998, because they had distributed leaflets by putting them through the letterboxes of potential customers within their catchment area, and because they had increased the size of their catchment area. These measures had been very successful and the sales for February and March 1999 recorded in the blue account books handed over to Mrs Dearnley, and the sales revealed by the more detailed records which she had requested they keep were much higher. Until late 1998 they had been obliged to keep their delivery area quite small, since they had been unable to recruit staff, particularly delivery drivers, but towards the end of 1998 a number of family members had started working at the shop; it was for that reason they had been able to increase their capacity and also the area within which they could make deliveries.

The evidence we heard on this issue was unsatisfactory. There were differences between the appellants as they gave their evidence, particularly about the period when the leaflet distribution took place, and there were differences too between their evidence before us and what had been said, at the interview and in correspondence, before the hearing. We bear in mind that the leaflets were distributed, if they were distributed at all, rather more than five years before the hearing, and it would be remarkable if each of the appellants could remember every detail of what was done and when. Indeed, if each of them had given identical evidence there would, we think, be good reason for thinking that their evidence was concocted. There was some evidence that large numbers of leaflets had been printed, since the appellants were able to produce invoices from the printers. However, the invoices were dated in April and September 1999, and the relevance of the leaflets to which they refer to the issues in this appeal must be doubtful. Mr Pars told us that the April invoice was a duplicate (since the original could not be found) of one which was in fact rendered in January 1999, but we are not satisfied that this in fact the case; his evidence was inconsistent with that of his partners, which was to the effect that the appellants already had a large number of leaflets – they estimated about 12,000 – which they began to distribute in December 1998 or January 1999, ordering a replacement printing when they were exhausted.

We did not see a leaflet, but had to rely only on photocopies. It appears that the leaflet consisted of a single A4 sheet of paper carrying the appellants' menu on one side, and – for no evident reason – three separate indications that the appellants offered free delivery on the other. We can accept that the distribution of large quantities of leaflets would be likely to result in increased sales but, rather to our surprise, the appellants did not say that deliveries had increased at a greater rate than shop sales, despite the emphasis in the leaflets on the availability of deliveries, and despite their evidence that they had increased their delivery area. Nevertheless it seems to us more likely than not that if the leaflets were effective in increasing the level of sales overall, there must have been a disproportionately greater increase in delivery sales.

We are willing to find as a fact that leaflets were distributed at some time between late 1998 and early 1999, and over a period extending for some weeks, and that there was some increase in sales in consequence; but the evidence was not sufficiently clear or reliable for us to make any more precise finding. We have dealt with the issue since it occupied a significant part of the hearing. However, as will emerge, it is in our view irrelevant to the outcome of the appeal whether there was a leaflet distribution, and if so when it took place, and what effect it might have had.

Mrs Brennan used the information available to her – the observations records, what was revealed from the cashing up, the blue accounts books and the more detailed records prepared by the appellants following Mrs Dearnley's request – in order to make a number of calculations. The later, more detailed records enabled her to calculate the average price of a delivery sale; since, as the appellants confirmed, there was no price increase within the relevant period that was, she thought, a reliable figure. Using the same detailed information, she was able also to calculate the proportions of total sales which delivery and shop sales respectively represented. By applying those results to the observations of numbers of delivery sales observed on the two days in November and December 1998, she was able to calculate that some of the takings had been suppressed, and by how much. She could then extrapolate her conclusions so as to cover the entire period of the period covered by the assessment.

Although he did not formally abandon it, Mr Barlow did not pursue the argument that Mrs Brennan's approach offended the requirement imposed upon the Commissioners by section 73(1) of the Value Added Tax Act 1994 – that is that an assessment must be made to the Commissioners' best judgment. Instead, he argued that the calculations took no, or no sufficient, regard of the increase of sales recorded most recently in the blue record books and in the more detailed records kept by the appellants, which increases were attributable to their distribution of leaflets, and which were evidenced too by the increase in their staffing; that the observations were fallible and unreliable; and that Mr Redha's readily handing over the delivery tickets and cash within his pocket on 19 March 1999 was inconsistent with the behaviour to be expected of a dishonest trader seeking to conceal the truth.

Although those arguments cannot be dismissed entirely, they have, in our view, rather limited merit. As we have indicated, and shall explain further, any increase in sales which might have resulted from the leaflet distribution is irrelevant to the determination of the true amount of tax for which the appellants should have accounted. We are satisfied that the observation records are reliable, although we differ from the respondents on the interpretation to be placed on them. We acknowledge that Mr Redha's demeanour on 19 March 1999 counts in his favour and we will return to that point in due course.

On the other hand, there are a number of errors in Mrs Brennan's calculations – and some which remained even after the revision of the calculations – and, as we have concluded, some different and, we think, better ways in which the available information can be interpreted. Nevertheless, we think it an inevitable conclusion that there has been suppression of takings. We are satisfied too that the errors in Mrs Brennan's approach are not fundamental but of detail, and that her calculations, and those of the officer who reviewed them, meet the best judgment test.

We have examined the observation records with considerable care. We have been somewhat handicapped by the fact that the photocopies with which we were provided are incomplete, because the originals are slightly greater than the A4 pages on which the copies have been made, and the copies are also crooked; the taking of a little more care in preparing the photocopies would have made our task a great deal easier.

While we recognise, as the appellants themselves acknowledge, that when the observations record two or more pouches being taken from the shop they may represent two sales, we do not think it appropriate that that assumption should be made, as it has been, on every occasion. We think that instances of a second delivery to the same customer, correcting a mistake, would have been rare but are satisfied the possibility should not be disregarded. We think it rather more likely that two pouches might have been used for a single delivery, because the customer has placed a large order or because he has ordered some hot items and other cold items. Although it might be slightly generous to the appellants, we think it appropriate, in order to balance these factors and to reflect the fact that a dishonesty penalty is in issue, to assume that for each time one or more pouches were seen to be taken from the shop and placed in a delivery car, a single delivery should be counted. We have detected too a few occasions on which Mrs Dearnley, in her analysis of the number of deliveries (which Mrs Brennan accepted without making her own calculation) has double-counted a delivery since it seems clear from the observations that the delivery driver has taken a pouch out of the shop and then immediately returned (we do not speculate on the reason) before emerging again from the shop and making the delivery. Making appropriate adjustments for those factors, we have come to the conclusion that the numbers of deliveries which should be taken for the purpose of making calculations of the correct takings is 20 on 24 November 1998 and 48 on 4 December 1998.

By using the detailed records, Mrs Brennan calculated that the average value of a delivery sale was £7.30. She acknowledged as she gave her evidence that the figure was wrong, and that the correct value was £6.98; she had made an arithmetical error but could not now explain why. Her error was, later, noticed and the correct figure is incorporated in the revised calculations which led to the reduced assessment. We have made a similar calculation of our own, but have refined it in order to determine the average value or a delivery sale on Tuesdays and Fridays, the dates of the observations. These are £6.89 and £6.84 respectively. If we then take our calculation of the reliably observed deliveries on each day of observations, we achieve, for Tuesday 24 November 1998, an aggregate value of £137.74, being 20 deliveries at £6.89 each; and on Friday 4 December 1998 an aggregate value of £328.40, being 48 deliveries at £6.84 each. The observations records show to our satisfaction some 30 shop customers on the first of these days and it is, we have concluded, quite implausible that the aggregate takings, that is both shop and delivery sales combined, amounted to only £138, the declared figure. The comparison is not as stark when one looks at Friday 4 December 1998; the declared takings were £452.20, and therefore some £123.80 more than the expected value of the delivery sales (though adopting our rather more conservative approach to the calculation of their value). On our reckoning there are 99 shop sales (rather than the 100 counted by Mrs Dearnley) but it stretches credulity that they should have an average value of as little as £1.25, which they must if their aggregate value is truly as little as £123.80.

Mrs Brennan's analysis of the detailed records kept by the appellants following Mrs Dearnley's request led her to the conclusion that delivery sales represented 45% of the total. We have again made a rather more detailed analysis of those records ourselves, to see whether there are any significant variations between one day of the week and another but none is to be detected; we have a high of 46.97% on Wednesdays and a low of 42.07% on Fridays and our average of 44.95% is for all practical purposes identical to Mrs Brennan's.

It is worth mentioning that if the exercise of distributing leaflets had the desired effect of increasing sales, and delivery sales to a greater extent than shop sales, it would follow that in the autumn of 1998 deliveries represented a smaller proportion of the total volume of sales than they did in late March, April and May 1999. If so, the next stage of Mrs Brennan's calculations, to which we are about to turn, would lead to a result less favourable to the appellants than in fact was the case. For those reasons we do not propose to adjust Mrs Brennan's figures to take account of any changing pattern of trade; and that is why we regard the leaflet distribution as irrelevant. We are willing to accept that there was an increase in the overall volume of trade as a result of the distribution of leaflets, but the assessment is based not upon the volume of trade but upon the proportions which the two types of trade – shop and delivery - bear to each other; and, if one leaves out of account as we do the possible adjustment, there is no evident reason why the proportions determined from the detailed records should not be applied to the historical declarations.

If one assumes that on 24 November 1998 the correct value of the delivery sales of £137.74 represented 44.95% of the true aggregate takings, their value was £306.46 and the declared figure of £138 represents a shortfall of £168.46 from that true figure; in this instance, assuming the figures are reasonably accurate, the rate of suppression (expressed as a percentage of the takings) is 55%. The corresponding figures for 4 December 1998 are the ascertained value of delivery sales of £328.40, the calculated true value of total sales £730.67 and the declared value of £452.20, representing a shortfall of £278.47; in this case the rate of suppression is 38%. The average suppression, taking the two days together and weighting them by volume of sales, is 43%. Although, as we have explained, our approach to the calculation of the observed deliveries is rather more conservative than that applied by the Commissioners, we think it appropriate to assume that 43% of takings (rather than the Commissioners' 57%) have been suppressed. We recognise that a suppression rate of 43% is, if only approximately, consistent with the conclusion that delivery sales, at 45% of the total, have been suppressed but we think the close approximation is probably no more than a coincidence.

The revised assessment corrects some minor arithmetical errors (as well as the more significant error we have mentioned) and also makes (where the original assessment did not) some allowance for zero-rated sales, of 1.1% of the total. The appellants' menu shows that some salads were available, and we think it right that an allowance should be made. Mr Barlow did not challenge the amount of the allowance, and we adopt the Commissioners' figure.

After making that allowance, and on the assumption that the suppression rate was 43%, we have recalculated the assessment, period by period, and the results are shown in Appendix A to this decision from which it will be observed that we have arrived at the conclusion that the sum assessed should be £27,059.42, a reduction of £15,112.58 on the revised assessment. We determine the appeal against the assessment on that basis.

As we have mentioned, Mr Barlow did not argue that there was any innocent explanation for the under-declarations, assuming that we should find that there were any. We are satisfied, as we have indicated, that there were, and we are satisfied too that the understatements were due to a dishonest attempt to evade the payment of the correct amount of tax. It is in our view obvious that under-declarations of this kind, which the appellants have sought to conceal, are due to an attempt to evade the payment of the correct amount of tax.

The grounds for the imposition of the penalty are, therefore, made out. We can see little basis too for adjusting the amount of mitigation allowed by the Commissioners. It is true that Mr Redha handed over the delivery slips and the cash in his pocket when Mrs Dearnley and Miss Ward visited the premises and that he did so readily. That fact counts in the appellants' favour, but the Commissioners have already given credit for it. It is true too that other records were handed over, but if they were false records, as it seems to us they were, little mitigation should be earned on that account. We recognise too that the partners attended two interviews, again without obstruction or procrastination, but we do not think it can be said that they rendered much assistance to the interviewing officers. Nor can it be said that they have shown much, if any, remorse, or willingness to assist the Commissioners or the tribunal in determining the correct amount of tax. We do not, therefore, propose to adjust the amount of mitigation allowed by the Commissioners.

The penalty does however need to be adjusted by reference to the reduced amount of tax assessed and we set out our calculation of the penalty, as so adjusted, at Appendix B. The aggregate amount of the penalty is therefore determined at £20,383. Mr Poole told us (although it is by no means clear from the documentation accompanying the notice imposing it) that the penalty for the first period, 04/97, was intended to cover only the time from 9 February 1997 to 30 April 1997, upon the basis that Mr Pars was a sole proprietor until 9 February 1997, when Mr Redha and Mr al-Musawe joined him in partnership. Although there was some doubt about the correct date of the partnership, Mr Barlow did not challenge the adoption of 9 February 1997 and we have no material on which we could adjust it. Mr Poole also said that the amount of the penalty had been arrived at by time-apportionment, but if it has, the calculation is wrong. Our calculations do reflect a time-apportioned allocation of the tax sought to be evaded to the period for which the penalty has been imposed, and lead to a further reduction in the overall amount.

We allow the appeal to that extent. However, the appellants have failed on the main issues, namely whether they have suppressed a substantial amount of tax, and whether they did so dishonestly, and in substance it is the Commissioners who have succeeded. Mr Poole sought a direction in favour of the Commissioners in respect of their costs which we think it appropriate we should make. If the amount of the costs cannot be agreed the parties are at liberty to apply to the tribunal for further directions regarding their assessment.

COLIN BISHOPP

CHAIRMAN

Release date:30/06/2004

MAN/00/0334

APPENDIX A

period declared sales true sales output tax* declared shortfall assessed* reduction

Apr-97 £ 56,718.63 £ 99,668.79 £ 14,681.00 £ 8,414.57 £ 6,266.43 £ 9,787.00 £ 3,520.57

Jul-97 £ 23,820.91 £ 41,859.29 £ 6,165.78 £ 3,510.38 £ 2,655.40 £ 4,134.00 £ 1,478.60

Oct-97 £ 27,694.91 £ 48,666.87 £ 7,168.53 £ 4,087.38 £ 3,081.15 £ 4,800.00 £ 1,718.85

Jan-98 £ 27,313.01 £ 47,995.78 £ 7,069.68 £ 4,030.48 £ 3,039.20 £ 4,735.00 £ 1,695.80

Apr-98 £ 25,449.38 £ 44,720.91 £ 6,587.30 £ 3,752.85 £ 2,834.45 £ 4,414.00 £ 1,579.55

Jul-98 £ 25,909.96 £ 45,530.27 £ 6,706.51 £ 3,819.05 £ 2,887.46 £ 4,496.00 £ 1,608.54

Oct-98 £ 27,963.82 £ 49,139.41 £ 7,238.13 £ 4,124.91 £ 3,113.22 £ 4,849.00 £ 1,735.78

Jan-99 £ 28,591.36 £ 50,242.16 £ 7,400.56 £ 4,218.45 £ 3,182.11 £ 4,957.00 £ 1,774.89

totals £ 243,461.98 £ 427,823.48 £ 63,017.49 £ 35,958.07 £ 27,059.42 £ 42,172.00 £ 15,112.58

* allows 1.1% zero-rated sales

APPENDIX B

as assessed as adjusted as adjusted as adjusted

period penalty liable tax 90% penalty liable tax 90%

Apr-97 £ 3,488 £ 3,139 £ 1,859 £ 1,673

Jul-97 £ 4,134 £ 3,720 £ 2,655 £ 2,389

Oct-97 £ 4,800 £ 4,320 £ 3,081 £ 2,773

Jan-98 £ 4,735 £ 4,261 £ 3,039 £ 2,735

Apr-98 £ 4,414 £ 3,972 £ 2,834 £ 2,551

Jul-98 £ 4,496 £ 4,046 £ 2,887 £ 2,598

Oct-98 £ 4,849 £ 4,364 £ 3,113 £ 2,801

Jan-99 £ 4,957 £ 4,461 £ 3,182 £ 2,863

£ 35,873 £ 32,283 £ 22,652 £ 20,383