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United Kingdom VAT & Duties Tribunals Decisions

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Cite as: [2004] UKVAT V18736
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Begum v Customs and Excise [2004] UKVAT V18736 (17 August 2004)

    VAT — assessments — observations and "test eats" — average suppression rate calculated using average meal bill declared sales and observed sales — to best judgment — appeal dismissed

    MANCHESTER TRIBUNAL CENTRE

    ASHRAFUN NESSA BEGUM Appellant

    - and -

    THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents

    Tribunal: Mrs E Gilliland (Chairman)

    Mrs M Kostick BA FCA CTA (Member)

    Mr J P M Denny (Member)

    Sitting in public in Manchester on 2 and 3 June 2004

    Mr Alam, Accountant, for the Appellant

    Mr James Puzey, of counsel, instructed by the Solicitor's Office of HM Customs and Excise for the Respondents

    © CROWN COPYRIGHT 2004


     

    DECISION

  1. The appeal before the tribunal is that of Mrs. Ashrafun Nessa Begum (the Appellant) against assessments raised by the Commissioners in respect of the Appellant's business of an Indian restaurant and take-away carried on at premises at 659-661 London Road Heeley Sheffield S2 4HZ under the trading name of New India Garden Restaurant. Because of poor health the Appellant has not attended the hearing which has not been adjourned. She is however represented by Mr. Mohammed Nurul Alam of Alam & Company, Cost and Executive Accountants, and Mr. Alam has called one witness being the Appellant's husband Mr. Noim Ullah who had previously owned and run the business.

  2. Mr. James Puzey has presented the case for the Commissioners. He has called in total 9 witnesses including the assessing officer Mrs. Deborah Hardwick as no witness statements were agreed.

  3. For the assistance of the Appellant and the tribunal Mr. Puzey has opened the case. He has gone through with us the assessments which are the subject of the appeal. There are a number of disputed decisions in the bundle of papers before us. The first a Notice of Assessment pursuant to s.73 of the Value Added Tax Act 1994 (the Act) dated 25 October 2000 was originally in the sum of £99,988.00 plus interest. That however has been amended to £96,384.00 by removing from the calculations those for the period 9/97 which when the assessment was issued were out of time. The corrected interest figure will be dealt with administratively. The periods covered by this assessment are accordingly 10/97 to 3/00 inclusive.

  4. For the period 6/00 after the end of the period of the first assessment no return had been filed. There was a computer assessment of £3,119.00 dated 23 October 2000 and calculated on the Appellant's previous declarations. Subsequent to the issue of the same the return for the period 6/00 was received. The Commissioners did not accept that the VAT therein reflected the extent of the liability and the Commissioners accordingly cancelled that amount and re-imposed the previous assessment on 29 October 2001. The combined amount was £13,404.00. The other figure comprised within this total was in respect of the assessment dated 5 December 2000 for the sum of £10,285.00 (plus interest) which represented additional VAT arrears for the period 6/00. There was a computer generated issue on the failure of the Appellant to submit a manual final period return by way of a Notice of Assessment dated 20 October 2000 in the sum of £7,968.00. That assessment was subsequently cancelled by the receipt of the final return but the figures were not accepted so the additional assessment was accordingly raised and this is set out in a letter addressed to the Appellant in October 2001 and a calculation of this final assessment is by way of the final return figure of £1,359.15 and the additional liability calculated by the Commissioners of £6,608.85. Lastly appealed against was the decision of the Commissioners to impose a default surcharge pursuant to s.59 of the Act. This showed the Appellants' VAT account at 23 October 2000 inclusive of a surcharge figure of £950.71. However that figure was not correct and was increased on 1 December 2000 to £2010.60. Mr. Alam has confirmed to the tribunal that this is the actual figure under this head appealed against. Under the provisions of s. 59 of the Act the Appellant to avoid liability would need to satisfy the tribunal that she had a reasonable excuse.

  5. The background of the matter is that the Appellant acquired the business by way of transfer of a going concern from her husband on 1 April 1997. She was registered for the purposes of Value Added Tax under number 694 5062 12. We are informed that the Appellant de-registered on 21st August 2000. We are told that the Commissioners believed that the full takings of the business were not being declared and a procedure was set up for covert observations and "test eats" during a period from 18 March 1999 to 28 January 2000. The results are scheduled and produced to us in the bundle before us. There was a test run on Thursday 18 March 1999. This did not constitute a full night of observations and was not used in the calculation of the assessments. The other nights were Friday 30 April 1999 ; Friday 16 July 1999 ; Thursday 22 July 1999 ; Wednesday 15 September 1999 ; Friday 10 December 1999 and Friday 28 January 2000. The procedure followed was that teams of officers of two at a time visited the restaurant, ate a meal and counted the other customers eating and those having takeaways and recorded their findings. The process of counting was that each team of officers would count from the moment they sat down until the succeeding team of officers sat down. That method was to ensure that there was no duplication of counting. The schedules before us show that 3 shifts were undertaken on 30 April 1999 and 4 shifts on 16 July 1999, 22 July 1999 and 15 September 1999 with 5 shifts on each of 10 December 1999 and 28 January 2000.

  6. It was the evidence of Mrs. Hardwick the assessing officer that she then sought to view the Appellant's records. On 6 June 2000 she received two carrier bags of documents which included the declared meal bills for the observed evenings and copies of these are in the tribunal bundle. A procedure was then set in place to compare the number of customers observed with those declared. Counsel has referred us to the number of covers having been shown on each bill and in most cases the number of main courses shown would verify this figure. Takeaway bills marked "out" are also included. We are told that from the information obtained from this paperwork the average meal bill could be calculated and also the average takeaway value. These averages were multiplied by the number of customers or takeaways seen and in this way the assessing officer could reach a figure for projected takings. By way of example we were taken through the analysis of the figures for 30 April 1999. The number of covers was shown as against the number of takeaways and columns then inserted for the numbers of customers seen and takeaways seen. The meals of the officers themselves were also set out. The average cost of a meal in was calculated at £6.84 and a takeaway at £12.15. The average was multiplied by the additional customers seen over those declared and this produced a suppression rate of 59%. The same method was used for each nights observations, the rates for the subsequent nights being 66%, 81% 82%, 70% and 71% making an average suppression rate of the full nights' observations of 71.5%. It was this rate that the assessing officer applied to the last three years as set out in a schedule (sheet 1 page 29) of the bundle. The business for part of the period as shown had been on monthly returns. In her evidence the assessing officer confirmed that whilst there was some fluctuation in gross takings she did not see any particular pattern and accordingly applied the suppression rate to the full period. She considered that there was no evidence that suppression had started at a particular time during the period and she would have expected that had that been the case it would have shown up. In the schedule to which we have referred the period 9/97 was still included but as indicated earlier the assessed amount was subsequently calculated downwards with the exclusion of that period.

  7. The Commissioners wrote to the Appellant's Accountants on 18 July 2000 suggesting that their clients VAT returns might be incorrect and proposing an interview. Two days before the proposed date the Commissioners were informed that the Appellant could not attend and they were asked to get in touch after the 10 September. We are told that what happened next was that the business was sold. Mrs. Hardwick in evidence said that it was believed by the Commissioners that the sale was to the Appellant's son. This however has been denied by the Appellant's representative at this hearing and his witness has also insisted the sale was to a third party. There is no dispute however that the Appellant was de-registered from 21 August 2000. Mrs. Hardwick has told us that on the 10 September 2000 she spoke to the Accountant who told her that the Appellant would be staying in India indefinitely. In the absence of any further information this led at the end of October 2000 to the Commissioners issuing the first assessments under appeal. At that time neither the returns for 6/00 nor the final return had been received. After the assessment dated 25 October 2000 initially in the sum of £99,988.00 there were assessments from the Central Assessing Office in respect of 6/00 and 9/99. There were then the filings of the returns and the adjustments dealt with in a letter of October 2001 to produce for the totals of £13,404.00 and £7,968.00. The actual operation of the various procedures had led to the amended assessment ; the Central Assessments were overridden ; the assessing officer did not accept the accuracy of the last two returns made by the Appellant and she accordingly by the October correspondence gave notification of the last two sets of figures. So far as the last two periods were concerned in a schedule in the bundle (page 112) the assessing officer worked out what would have been likely to have been declared and any actual output due.

  8. As we have indicated as all the witness evidence had been contested a witness was called being one of the two person teams for each shift over the relevant observation nights. As most of the officers in the exercise had done more than one shift they were speaking to more than one event. Accordingly each shift of the observations was covered by one witness. Each witness called was cross-examined by Mr. Alam and the tribunal was referred to the relevant internal observation record in the bundle for each witness. This took the form of a standard questionnaire which was completed in handwriting after each shift. The records were signed dated and timed by each witness on each sheet. Standard questions were replied to for example "how was [this] order taken? who by? how much was the total bill (excluding tip) (i.e. of the officers on shift) ; how many customers did you observe taking meals? ; can you give details of customer groups? ; did you observe any takeaway meals? ; can you describe the takeaway groupings? ; how many staff did you observe? – give details". There was a section for any other observations and exceptions were also recorded. The exceptions listed referred for example to circumstances where one of the officers had not been able to make the full count that his or her colleague did usually because of where he or she was sitting. Each witness in examination-in-chief or in one case in re-examination with consent confirmed the date and time of the shift and the colleague attended with and confirmed the details of the signing and completing of the questionnaire and the customer numbers. Each confirmed that the relevant questionnaire had been completed with his or her colleague at the time shown and while the events were still fresh in the memory. It is clear from the evidence which was given to the tribunal that none of the officers had made a note or record during his or her individual shift. Although Mr. Alam questioned how effective this process could be when the writing-up took place after the shifts had concluded we are satisfied that each officer was familiar with the standard form and the questions in it and we find that the completion of the forms took place sufficiently quickly for this not to require any feat of memory. We are satisfied also with the system of exception reporting which identified when an individual officer had difficulty in giving a precise answer to a particular question. Mr. Alam in cross-examination of individual officers ascertained that the officers paid in cash having obtained the money in advance and invariably left a tip. We find no issue arises as to method of payment by the officers and the meals were taken as recorded. Mr. Alam also cross-examined various officers as to whether a copy of the bill had been taken by each when he or she left ; in no case did the witness confirm having taken a copy bill. Again we see no point of issue on this. The position would appear to have been that no copy of the bill was offered but we see no reason why the individual officer should therefore have requested one. When cross-examined Miss Lynne Bradley whilst she could not remember the number of seats could remember the layout of the restaurant Mrs. Hardwick was able to put the number of seats from memory at about 70. It was subsequently confirmed by Mr. Alam that there were 70 covers.

  9. The assessing officer also gave evidence to the tribunal. She had had conduct of the matter other than for a brief period when she was seconded away and Suzanne Hurst (one of the witnesses at the hearing) had taken over from her. This she believed was in the summer of 1999. All the forms had been returned to her. She had prepared the schedules and believed that she had correctly transposed the relevant information. She described the restaurant to us as generally busy though she had not seen it fully occupied. It was June 2000 when she obtained the papers to enable her to compare the recorded sales and bills retained with the observations. A check could also have been made against the main course taken but Mrs. Hardwick did point out that this was not entirely reliable. So far as she was aware the restaurant traded 7 days per week. Mrs. Hardwick was asked by Counsel for the Commissioners during examination-in-chief whether there was any information which she had later received which would make her change her view about the matter under appeal other than the deletion of the first period which had been provided for in the amended assessment and she said that there was nothing material. However subsequently in response to a point raised by the tribunal a further re-calculation was produced to the tribunal based on a 69.98% suppression rate. The issue raised by the tribunal was in connection with the meals taken by the officers themselves which the assessing officer had merely included in the schedule producing the suppression rate 71.5% even though these could be seen as not part of the normal evenings trading. The re-calculated schedule operated from the period 10/97 to 3/00 and added in as in the previous schedule the period 06/00 and 09/99. The method of calculation was unchanged but the reduced suppression rate was applied and produced a total of £89,548.00 in lieu of the amended figure of £96,384.00 for the first assessment. It is our view that this is a relevant factor so far as the assessments are concerned in that the attendance of the officers was not part of the normal trading pattern and should not be taken in establishing the same.

  10. Mr. Alam in cross-examination of Mrs. Hardwick put it to her that the guidelines for a control visit had not been met by her particularly since he said that an important part of the control visit was the completion at the premises of the questionnaire. Mrs. Hardwick's response was that there were different kinds of procedures and in this case there had been observations first with the questions to come later though in the event she had not had the opportunity to put those questions. Mr. Alam then referred to some correspondence. There was a letter from Alam & Company dated 24 November 2003 to which a response (undated) was sent by Mrs. Hardwick. Copies of the letters though not in the original bundle are now before us. This letter of 24 November 2003 would appear to be the only one from the Appellant or her advisers which sought to deal with points arising in connection with the assessment. The Accountants were critical of the assessments which they found ridiculously high for the nature of the business with certain relevant factors excluded namely wastage ; the profit margin on drinks ; the lack of reference to free containers and also the extent of neighbourhood competition. Mr. Alam followed this through at the hearing by asking why the assessing officer had not considered purchases relevant in determining output tax. In her undated letter and in replies to cross-examination Mrs. Hardwick made it clear that the calculations were based on the value of declared meal bills and the observations of the officers. She did not accept the contention that a true figure could not be obtained by looking at a sale without the purchase overheads. This Mr. Alam put forward as the proper accounting practice so far as the observing procedures were concerned. Mrs. Hardwick was satisfied that there would not be duplication with the same customer counted twice as an officer on a shift would not count in anyone who was already seated but only those who came through the door. As to identifying the cash payments of the officers in the declared records Mrs. Hardwick said that she had sought to do so but had found only one in other words the balance of the cash takings from the officers were not in the records. The officer was satisfied also that customers who left without buying would be identified in an exceptional report. So far as the till use was concerned it would be hard she said to see from most of the tables as it was placed near the door. In response to re-examination by Counsel for the Commissioners Mrs. Hardwick again explained that she considered the methodology used that is of examining customers through the door more reliable then checking purchases and adding a mark up particularly as there could be difficulties in setting a figure on wastage and further where there were zero-rated purchases these were not always recorded; nor could an examination of purchase records necessarily provide verification as payments could be in cash or for some reason not in the records. In other words unless an assessing officer could be satisfied that the purchases were themselves correct there would be no point in putting into effect a mark-up exercise.

  11. There did appear to be some confusion in the evidence of Mr. Cosmo Williams in respect of the visit he made with Mr. Broomhead on 28 January 2000. They had stated in response to question 34 of the standard form that they had observed 24 customers taking meals but when in the next question they were to give details of the customer groups the total came to 16 only. Mr. Williams could not remember the remaining 8 customers but was insistent that the number 24 would have been agreed by his colleague and he before it was written down. We accept the evidence of Mr. Williams and see no reason to query his total.

  12. The witness called by Mr. Alam on behalf of the Appellant was Mr. Noim Ullah the husband of the Appellant. He confirmed that he had started the restaurant in 1989 before transferring it to his wife in 1997 because of his ill health. Reference was made in the course of examination-in-chief to a VAT matter during the period of Mr. Ullah's ownership of the business. However the tribunal does not have any written material on this nor do we consider that it is relevant to the appeal as it was outside the period of the Appellant's ownership and operation of the business. Mr. Ullah has told the Appellant's representative that since the transfer he had not helped in the business and has denied that he was the "bald-headed" person described as working there in 2000 and indeed appearing to be in charge or that he had assisted his wife otherwise than by way of advice. So far as the business was concerned he considered that it had been better in his own time. His son had started up his own business and that took some of the customers away. He disputed the numbers used by the Commissioners and said that 50 to 60 diners was a maximum figure as there were Health and Safety obligations and the food that was prepared was for 50 people otherwise there would be too much wastage. Although he had transferred the business however Mr. Ullah had retained ownership of the building. He said that the keys had been handed over to a third party purchaser on 20 August 2000. Even though his wife had not wanted to sell up the business had to be sold once it was going down and no one was looking after it. Although he was a chef he could turn his hand to anything. Whilst Friday was the best night and Monday poor he said that the maximum number of customers on a Friday could be 60 or 70 only as there were 68 seats and people did not like to share tables. On Saturday the numbers could be 70 to 80 people but again not all at one time because there were only 68 seats. The business hours Mr. Ullah confirmed as 6. p.m. to midnight. Sometimes people did not pay up particularly on Fridays ; the area was not good. Although there was a till, the bills were made out by hand and so the figures were not put through the till ; he did not know whether his wife had a manager, as he put it she owned the business and he was ill. He queried also the kind of figures put forward for the bills, he said that the average meal price at its highest was £5.90. In response to cross-examination by Mr. Puzey he said he knew these figures since the same price still held from his time because of the competition. Whilst acknowledging that he sometimes came down into the restaurant to take food he denied dealing with the customers. He did indicate that he was involved in the sale as the building was his even though his wife had paid him no rent. He once more strenuously denied that he was still running and frequently in the restaurant during 1999/2000 ; because of his poor health he could not tell the tribunal anything about how the business had been run whilst in his wife's care.

  13. It is the case of the Commissioners that in 1999-2000 there was a carefully planned and properly executed series of observations at the restaurant. From the declared bills the average meal bill could be obtained as it was known how many customers each bill related to as that was endorsed on the bill. The Commissioners pointed out that almost none of the Commissioners' officers' bills were declared. Counsel submitted that this was because cash takings were being suppressed and accordingly the suppression rate would vary night by night dependent on how many cash customers there were during the course of an evening. Mr. Puzey drew the tribunal's attention again as an example to the observations on 30 April 1999 when there were declared bills representing 44 customers whereas observations showed 112 eating in and in respect of takeaways 11 declared and 25 observed. He submitted that it could not be suggested that the Commissioners had over-counted by 68 customers eating in and 14 additional takeaways. Counsel took us through the totals declared and observed for each of the observation evenings in each case showing separate figures for eating in and takeaways. He referred also to the figures for Wednesday 15 September 1999 and pointed out that the observed eat-in customers came to 73 (as against 12 declared) and this figure was more than Mr. Ullah claimed could be served even on a Friday evening. Nor was Mr. Puzey satisfied with the evidence of Mr. Ullah as to the hours of the business when officers on observations were in the premises after midnight and saw other customers being served. The description of the business put by the Commissioners was of one which was very busy with high volumes and low costs and with ample opportunity for cash suppression. Until November 2003 no alternative calculations had been put forward despite the attempts made by the Commissioners and all promises made to them. So far as best judgment was concerned the submission of Counsel for the Commissioners was that the Appellant was not close to meeting the Rahman test for a decision not being too best judgment. The quantum of the assessment could be open to challenge to the extent only that there could be removed from the calculations figures over and above what the trader would have had. The 6 nights of observations were more than adequate for a test sequence as they were on different days and there was justification in proceeding back from 2000 because when looking at the declared takings during the period there was no particular pattern to the upwards and downwards movement of the takings.

  14. Mr. Alam has submitted that the quarterly VAT returns were paid when due and the only delay was in respect of the final return. In calling Mr. Ullah to the witness box Mr. Alam had wished to reflect his experience of the business though he said that his English was not entirely satisfactory. We have to say that we found Mr. Ullah's use of English perfectly adequate and we are satisfied that there was no lack of understanding. The Appellant according to her representative had taken over the business without having the necessary experience and had initially continued in her own way without taking advice. This was why the takings did not reflect the business during her husband's time. Mr. Alam had gone through Mrs. Hardwick's schedule and calculations that is £671,348.00 for three years and £267,208.00 for the declared figure making a total of £938,966.00. This would not justify the overheads and staffing levels. The witness had seen 5 or 6 full-time working staff but a high turn-over could not be achieved with a low number of staff. In Mr. Alam's submission it was difficult to believe that a small restaurant could do this large amount of business in 6 hours each evening. As for service after midnight he did not think that could be right as the restaurant did not have a licence to keep open. There had also he contended been a problem with correspondence as after the 20 August 2000 letters addressed to the old address could not have been received and the Commissioners had been told to send letters to the Accountants. There had been no negligence on the part of the Appellant in respect of correspondence which she had just not received. So far as the witnesses were concerned there was a uniform method and pre-organised procedure which he did not consider was necessarily reliable and acceptable. He considered that some witnesses were not sure when they had signed, the number of customers seen and the time and place of signing the statement. One or two witnesses had also put estimated figures but again he thought this unacceptable to a tribunal which would require definite evidence in support of an assessment. The statements were also weak in that they had not been completed at the time and indeed Mrs. Hardwick had not fulfilled her requirements for a controlled visit.

  15. Looking to the judgment of Lawrence Collins J in Rahman v Customs and Excise Commissioners (No. 2) [2002] STC 73 we note: "It follows from Van Boeckel, Rahman (No. 1) and McNicholas that to show, on an appeal that an assessment has not been made to best judgment the tax-payer must show that the assessment is wrong in a material respect, and that the mistake was such that the only inference is that the assessment was arbitrary (in Woolf J.'s formulation) or (in Carnworth J.s' formulation) dishonest, vindictive, or capricious or is based on a spurious estimate or guess, or is wholly unreasonable. If the assessment is wrong in a material respect but the tax payer fails to show that it was not made to best judgment the tribunal will deal with it on the quantum aspect of the appeal." Mr. Alam has submitted that the assessments were not to best judgment. However we do not find in the decisions of the Commissioners anything arbitrary or dishonest, vindictive or capricious or based on a spurious estimate or guess or wholly unreasonable. The methodology used was to examine observed against declared sales and from that calculate an average suppression rate. These figures were calculated and were not based on guess-work. Equally the figures supplied by the observing officers were properly recorded shortly after the termination of their appropriate shifts whilst all matters were clearly still in their minds. Each officer was aware in advance of the questions and knew what was required of him or her in his or her observations. Although a standard format was used for the questions the officers clearly knew to record what they could not see and duly noted this on the report so that all figures could be justified and no inaccuracies arise in the calculations.

  16. The issue of quantum is one before the tribunal. The Court of Appeal in Mohammed Hafiz Rahman v Commissioners of Customs and Excise [2002] EWCA Civ 1881 have stated that once a tribunal has rejected a challenge to the assessment on the basis of best judgment it is to consider whether the amount of the assessment is fair. We consider it proper and appropriate that there should be excluded from the calculations the meals taken by the officers. This reduces the suppression rate to produce the revised figure of the first assessment at £89,548.00. For the periods 06/00 and 09/99 the assessing officers schedule provides associated further revisions. We accept these revised calculations which the Commissioners have conceded by production of the schedule. Mr. Alam has objected to the formula used but we are satisfied with Mrs. Hardwick's explanation that she chose to use the declared sales of which she had paper records and the observations which she knew were properly recorded. We accept as reasonable her conclusion that the alternative method of purchases plus mark-up also unreliable and in any event no other precise or accurate figures were presented on behalf of the Appellant. We have seen nothing other than normal trade patterns during the period in question and we find no unpredictability in the schedules before us. We have not either been presented with or found any material on which to base a conclusion that the Appellant had a reasonable excuse in respect of the default surcharge.

  17. The appeal is dismissed.

  18. The Commissioners have not sought costs and we make no direction as to costs.

    19. MRS E GILLILAND
    CHAIRMAN
    Release Date

    MAN/01/0136

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