V19150 Ma & Anor v Revenue and Customs [2005] UKVAT V19150 (6 July 2005)

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Cite as: [2005] UKVAT V19150

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19150

VALUE ADDED TAX — dishonest evasion — enquiries set in train by settlement between taxpayers and Inland Revenue — whether background to settlement a material factor — yes, but of limited value — interview of Appellants — whether PACE caution necessary — no — interview admissible — observations — whether reliable — yes — whether reasonably interpreted — yes — some admissions made — whether credible — no — assessment reasonably calculated and no evidence to warrant an adjustment — penalty — sufficient evidence of dishonesty throughout period assessed — no additional mitigation warranted — appeal dismissed

MANCHESTER TRIBUNAL CENTRE

WONG LI MA and PAULINE MA

trading as PARADISE GARDEN Appellant

- and -

HER MAJESTY'S REVENUE AND CUSTOMS Respondents

Tribunal: Colin Bishopp (Chairman)

John Davison

Elizabeth Pollard

Sitting in public in North Shields on 19, 20, 21, 22, 25 and 26 April 2005

Peter Smallwood, VAT consultant, for the Appellant

James Puzey, counsel, instructed by the Acting Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2005

DECISION

Introduction

This is an appeal by Wong Li Ma and Pauline Ma, who trade in partnership under the name Paradise Garden from premises at Whitburn Bents Road, Sunderland. The business is a Cantonese restaurant. They dispute the Respondents' decision to assess them, in accordance with section 73(1) of the Value Added Tax Act 1994, for allegedly undeclared output tax of £151,515, which is said to have accumulated over the period from 1 May 1992 to 31 July 2001. The assessment, as originally issued, went back as far as July 1985, when the Appellants began to trade, but it has been adjusted twice, principally by the elimination of the earlier periods. Secondly, they challenge the imposition on them in accordance with section 60 of the Act of a penalty for civil evasion which, after adjustment to reflect the amendments to the assessment, amounts to £98,484 (that sum represents 65 per cent of the tax said to have been evaded, slightly rounded); the Respondents have mitigated the maximum 100 per cent penalty by 35 per cent, in order to reflect the Appellants' cooperation with them.

The Appellants admit some suppression of their takings and admit too that the suppression was due to their dishonesty, but they say that the suppression was limited to the periods from 1 November 1997 to 31 July 1998 and from 1 February 2000 to 31 July 2001, and that it was of a comparatively small amount. They argue that by assessing for a much longer period, and by overstating the degree of suppression during those periods when it occurred, the Respondents have arrived at an excessive amount of tax. They contend too that the penalty should be reduced to reflect the correct amount of tax evaded in those periods in which evasion occurred, and to nil in the remaining periods. Lastly, they argue that the residual penalty should be further mitigated. Additionally, they raised three preliminary points, relevant to all the issues we must determine.

The Appellants were represented by a VAT consultant, Peter Smallwood, and the Respondents by James Puzey of counsel. We heard evidence from twelve Customs and Excise officers (as they were at the time): George Wade, John Terrell, Lisa Orr, Karen McNeil, Malcolm Orr, Robert Martin, Andrew Johnston, Michael O'Flaherty, Yvette Hay, Ann Brown, George Liddle and Linda Hewitt (then Turner), the officer in charge of the investigation and who made the assessment; from Michael Scrymgeour, then an officer of the Inland Revenue; from Alan Lish, a customer; from Pui Hung Ma, the Appellants' son; and from the Appellants themselves. In addition, we were invited to read, and have read, the statements of three further Customs officers, Michael Hadley, Susan Ferguson and Mark Usher, which were unchallenged. We have also read the statement of Alan Bowes who had unfortunately died between the making of his statement and the hearing. His evidence was not agreed and we bear in mind that it has not been tested by cross-examination. Lastly, we were supplied with a substantial bundle of documents.

The investigations of the Commissioners of Customs and Excise were prompted by a letter to the Appellants' local VAT office of 8 February 1999, from what was at that time the Inland Revenue, giving particulars of a settlement which the Revenue had recently reached with the Appellants in relation to their income tax liabilities for the years 1992/3 to 1996/7, a settlement which the Appellants had not mentioned to Customs and Excise. It later emerged that an earlier (also unmentioned) settlement had been reached with the Revenue, in relation to the year 1990. The Inland Revenue's investigations with regard to the later settlement had consisted mainly of observations of trade at the restaurant.

The investigations with which we are concerned also consisted principally of observations, but the Respondents took into account as corroborative evidence the later of the settlements with the Inland Revenue, and they relied too upon some admissions made by, particularly, Mrs Ma at interviews, though they say those admissions do not go nearly far enough. They maintain that the suppression was of a much greater scale than the Appellants have conceded and, for their assertion that the suppression was not limited to those periods for which admissions have been made, they do not rely on any direct evidence, but point to the consistency, as they say it is, of the Appellants' VAT declarations from 1990 until 2001.

The preliminary issues

Mr Smallwood raised three preliminary issues, all of which he based upon article 6 of the European Convention on Human Rights, which confers the right to a fair trial and grants additional rights to those accused of criminal offences. An accusation of dishonest evasion, within section 60 of the 1994 Act, amounts for the purposes of the Convention to a criminal charge: see Customs and Excise Commissioners v Han and another [2001] STC 1188. This fact led to Mr Smallwood's three contentions: we should refuse to admit the interview evidence, we should direct the Respondents to disclose additional documents, and we should conduct the hearing upon the basis that the burden was on the Respondents of establishing their case to the criminal standard.

We should disregard the interview evidence, he argued, because the Appellants were not given a caution, in the form required by the code of practice referred to at section 67(9) of the Police and Criminal Evidence Act 1984 even though, as the Court of Appeal decided in R v Okafor [1994] 3 All ER 741, Customs officers investigating an offence are in the same position in this respect as are police officers, since evasion of tax amounts to an offence even if criminal proceedings are not in fact instituted. By the time the interviews began, the Appellants had been charged with an offence within the meaning of the Convention: King v United Kingdom (No 2) [2004] STC 911. The Appellants had what he described as "an inalienable right to silence": see Saunders v United Kingdom (1996) 23 EHRR 313.

It followed that the Customs officers who had interviewed the Appellants, when they were suspected of evasion, were obliged to administer a caution before the interviews began. Such warning as was given by Customs and Excise's Notice 730 did not amount to a caution: see R v Gill [2003] STC 1229, in which the equivalent Inland Revenue procedure, known as a "Hansard interview", was considered; rather, it amounted to an inducement to the Appellants to give up their right of silence. Since no caution had been administered, we should refuse to admit the contents of the interview and we should likewise refuse to admit anything said by the Appellants in interview by the Inland Revenue since no caution had been administered before those interviews either.

Subsections 60(4) and (5) of the 1994 Act (on which Notice 730 is founded, closely following its wording—the Hansard procedure is very similar) are in these terms:

"(4) Statements made or documents produced by or on behalf of a person shall not be inadmissible in any such proceedings as are mentioned in subsection (5) below by reason only that it has been drawn to his attention—

(a) that, in relation to VAT, the Commissioners may assess an amount due by way of a civil penalty instead of instituting criminal proceedings and, though no undertaking can be given as to whether the Commissioners will make such an assessment in the case of any person, it is their practice to be influenced by the fact that a person has made a full confession of any dishonest conduct to which he has been a party and has given full facilities for investigation, and

(b) that the Commissioners or, on appeal, a tribunal have power under section 70 to reduce a penalty under this section,

and that he was or may have been induced thereby to make the statements or produce the documents.

(5) The proceedings mentioned in subsection (4) above are—

(a) any criminal proceedings against the person concerned in respect of any offence in connection with or in relation to VAT, and

(b) any proceedings against him for the recovery of any sum due from him in connection with or in relation to VAT."

On this issue, we are satisfied that Mr Smallwood's argument is misconceived. In Customs and Excise Commissioners v Han and another, Potter LJ said of the Notice 730 procedure:

"[82] We have been informed that, whereas a variety of points await disposal, the commissioners' principal concern relates to their desire to make continued use of the 'inducement' procedure as a method of obtaining the co-operation of the taxpayer for the purpose of establishing the amount of tax evaded and imposing a civil penalty discounted upon the basis of the degree of co-operation received. It is envisaged that the commissioners may be vulnerable to the tribunal excluding as inadmissible evidence obtained during an interview, or subsequently, as a result of supplying to the taxpayer the statement of practice in Customs and Excise Notice 730. If such rulings were to become widespread it would significantly affect the ability of the commissioners successfully to defend appeals and would threaten the basis of the whole of the civil evasion penalty regime. Arguments have apparently already been 'flagged' to the effect that the inducement procedure may amount to a breach of the right to silence and the right against self-incrimination. Whether this is correct has not been argued before us. However, I would only observe that the fears of the commissioners seem to me likely to prove unfounded in this respect.

[83] It appears that the inducement procedure, at least as refined in December 2000, makes explicit to the taxpayer, in addition to the information supplied in Customs and Excise Notice 730, that the civil evasion investigation is not being conducted with a view to prosecuting the trader for VAT evasion, that the trader is not obliged to co-operate in the Customs investigation, and it is entirely a decision for the trader to decide whether or not to speak to the investigating officer or assist generally in the investigation. It must be remembered that the requirements of art 6(1) in relation to a fair trial, together with what has been held to be the implicit recognition of a right to silence and a privilege against self-incrimination, are of a general nature and are not prescriptive of the precise means or procedural rules by which domestic law recognises and protects such rights.

[84] It by no means follows from a conclusion that art 6 applies that civil penalty proceedings are, for other domestic purposes, to be regarded as criminal and, therefore, subject to those provision of the Police and Criminal Evidence Act 1984 and/or the codes produced thereunder, which relate to the investigation of crime and the conduct of criminal proceedings as defined by English law. Any argument as to whether and how far that Act and the codes apply is one which will have to be separately considered if and when it is advanced. In this context, however, the specific provisions of s 60(4) of the Value Added Tax Act 1994 are plainly of considerable importance. I would merely add my view that, if matters are made clear to the taxpayer … at the time when the nature and effect of the inducement procedure are also made clear to him (whether by Customs and Excise Notice 730 or otherwise), it is difficult to see that there would be any breach of art 6. It also seems to me that, even if the Police and Criminal Evidence Act 1984 were applicable, it is most unlikely that a court or tribunal would rule inadmissible under s 76 or s 78 any statements made or documents produced as a result, at any rate in the absence of exceptional circumstances. On the other hand, it follows from this decision that a person made subject to a civil penalty under s 60(1) of the Value Added Tax Act 1994 will be entitled to the minimum rights specifically provided for in art 6(3)."

It is true, as Mr Smallwood observed, that Potter LJ made it clear that the point had not been argued and that he should not be taken to have decided it; but his comments are nonetheless of some authority. We do not accept Mr Smallwood's contention that what the learned judge said has been overtaken, and effectively overruled, by R v Gill (also Court of Appeal authority); while the court concluded that a caution should have been administered by the Inland Revenue before conducting a Hansard interview (and in a case in which criminal proceedings, in the domestic law sense, followed) their failure to do so did not have the consequence that everything said in the interview must be excluded, even in the context of a criminal trial. If no caution has been given, the court or tribunal is left with the task of deciding whether or not to admit the evidence, and must do so after considering whether the failure to administer a caution was due to bad faith, and whether admission of the evidence would be unfair. It is worth observing that in this case, there is no suggestion that the Respondents strayed outside the confines of section 60(4), the interviews were conducted in June and October 2001, after the refinement referred to by Potter LJ, and the Appellants were accompanied to the interviews by their accountant. Indeed, the second interview took place at their own request.

We agree too with Mr Puzey that Saunders is not in point; the issue there was not the failure to administer a caution but the compulsory nature of the interview, since it was in itself an offence not to answer the questions, whether or not his answers might incriminate the person questioned, or to answer them untruthfully. The European Court of Human Rights ruled that such statements were inadmissible in a subsequent criminal trial. Here, traders attending an interview can remain entirely silent, without threat of sanction, if they wish. Furthermore, Mr Puzey argued, although the Commissioners had the power to instigate criminal proceedings, the interview in this case had been conducted on the footing that, if it was appropriate, a civil penalty and no more would be imposed and that was in fact what had happened. He urged us to admit evidence about the Inland Revenue investigations, and their outcome, because they were no more than corroborative of the investigations in this case and because, in any event, the evidence would be admissible even in a criminal court: see the Criminal Justice Act 2003, section 114(2).

Moreover, and even leaving to one side what Potter LJ said in Han, it seems to us that we can disregard the terms of clear, primary legislation (as the 1994 Act is) only for compelling reason. That might arise if we were persuaded that domestic legislation failed to implement a European directive correctly (see Becker v Finanzamt Münster-Innenstadt [1982] ECR 53), but it would not if we were to identify a conflict between the Convention and domestic legislation. The Human Rights Act 1998, by section 3, requires us "[s]o far as it is possible to do so", to interpret domestic legislation "in a way which is compatible with the Convention rights". It does not give us the power to disregard the domestic provision; as section 3(2)(b) says, that requirement "does not affect the validity, continuing operation or enforcement of any incompatible primary legislation". It is worth also remarking that article 6 of the Convention says nothing about the admissibility of evidence, beyond providing that a person charged with an offence is entitled to a fair hearing. A "fair" hearing does not mean one artificially weighted in his favour; it means one which is objectively fair. If evidence has been unfairly obtained, it might be appropriate not to admit it at all, or to admit it only with safeguards. But it is clear from the authorities we have mentioned that the mere failure to administer a caution cannot, of itself, amount to unfairness; and even if the absence of a caution should lead us to exclude evidence of the Inland Revenue interviews, no such objection could be made to the admission of evidence of their observations or of the fact that settlements had been reached.

We have therefore come to the conclusion that we should admit, and take into account, what was said at the Customs and Excise interviews and also such evidence as was available to us about the Inland Revenue investigation, including the interviews. We are not persuaded that any of the interviews was conducted otherwise than in accordance with a well-established procedure, when it was, or should have been, clear to the Appellants—not least from Notice 730 itself—that they were not obliged to cooperate, and could remain silent if they wished; indeed, the transcript shows that great care was taken to ensure that the Appellants were aware that cooperation was voluntary. We should perhaps add that Mrs Ma is a native English speaker; Mr Ma is not, but a copy of Notice 730 in Chinese was given to him, and there has been no suggestion that either he or Mrs Ma did not understand the Notice and its implications. Of course, our admitting the evidence does not imply that we have concluded that it is correct, nor does it dictate the weight to be attached to it, and we will return to those issues when we consider the evidence itself. As will be seen, we have found the interviews to be of little assistance.

Mr Smallwood wished us to direct disclosure of three categories of documents: the "briefing notes" issued to the officers before they began the observations; the notes made by them when making test purchases; and the "offence report" submitted by Miss Hewitt to the more senior officer who made the decision to impose the penalty. This contention too was based upon the article 6 right to a fair hearing, and upon the decisions of the European Court of Human Rights in Rowe & Davies v United Kingdom (2000) 30 EHRR 1 (in which it developed the already established doctrine that there should be "equality of arms" between the parties) and Foucher v France (1997) 25 EHRR 234 where there was found to be a breach of article 6 when a person charged with a criminal offence and defending himself was refused access to the case file which contained the evidence against him, even though his lawyer, if he had had one, would have been granted such access.

Mr Puzey told us that such of the briefing notes and officers' rough notes (from which they had later made up their notebooks) as could be found had been disclosed; there had been some others, but they could not be found. We learnt that the briefing notes were often destroyed as they contained confidential information, such as the participating officers' home telephone numbers, a fact we were able to verify from looking at the surviving notes; and that the rough notes had been simply lost. Mr Smallwood did not challenge the statement that the notes were no longer available, and for legitimate reasons, and did not pursue his application with regard to those items, though he did remark that the absence of the original rough notes undermined the reliability of the notebooks, a further matter to which we will return. We are not persuaded that the briefing notes—instructions to the participating officers on the manner in which the observations were to be conducted—should be the subject of disclosure as a matter of routine in every case, but we agree that, to the extent that rough notes are available, they should be disclosed (and care should be taken to ensure they are preserved), and that Foucher is in point.

Mr Puzey objected to the production of the offence report, which was, as he put it, a frank assessment by an officer, reporting to her superior, containing expressions of opinion (which having seen the report, we agree is the case); there was a strong public interest in its not being disclosed, since otherwise officers would be inhibited when preparing such reports. He relied upon the decisions of the tribunal in Nene Packaging Limited and others v Customs and Excise Commissioners [2001] V & DR 286, Lai and Lai v Customs and Excise Commissioners [2002] V & DR 570 and Dula Miah v Customs and Excise Commissioners (2002) VAT Decision 17920 in the last of which it was determined (by the present chairman) that an offence report need not be disclosed as it was irrelevant to the tribunal's decision; the tribunal, having a full appellate jurisdiction, is required to consider the evidence, rather than an officer's opinion about it. For the same reason, we did not direct the disclosure of the offence report in this case.

Section 60(1) of the 1994 Act is in these terms:

"In any case where—

(a) for the purpose of evading VAT, a person does any act or omits to take any action, and

(b) his conduct involves dishonesty (whether or not it is such as to give rise to criminal liability),

he shall be liable … to a penalty equal to the amount of VAT evaded or, as the case may be, sought to be evaded, by his conduct."

Subsection 60(7) provides that

"On an appeal against an assessment to a penalty under this section, the burden of proof as to the matters specified in subsection (1)(a) and (b) above shall lie upon the Commissioners."

Thus the burden rests on the Respondents of establishing three things: that the person concerned has done or omitted to do something; that the act or omission was done, or made, for the purpose of evading VAT; and that the person's conduct in doing or omitting to do that something involved dishonesty. The statute goes no further; but Mr Smallwood argued that it was necessary for the Respondents to establish additionally the amount of VAT evaded (or sought to be evaded) since the magnitude of the penalty depended directly on that amount. He recognised that, in the absence of specific statutory provision, the burden of proof before this tribunal normally rests on an appellant (see Tynewydd Labour Working Men's Club and Institute Limited v Customs and Excise Commissioners [1979] STC 570 and Grunwick Processing Laboratories Limited v Customs and Excise Commissioners [1987] STC 357) but referred us to the tribunal's conclusion in Bond House Systems Limited v Customs and Excise Commissioners [2003] V & DR 210 at 222 that where the Respondents assert a positive case, it is for them to establish it. He relied upon the ordinary principle of English law that innocence is assumed until guilt is proved; and pointed out too the unfairness which would be the result if a director or manager of a company, to whom such a penalty had been apportioned in accordance with section 61 of the 1994 Act, was left with the burden of establishing the amount of tax evaded (or that it was nil) when (by reason of his dismissal or the company's liquidation) he might have no access to the relevant evidence. Since an accusation of evasion within section 60 amounted to a criminal charge in the Convention sense it was appropriate that the standard of proof be that usual in criminal cases, that is beyond reasonable doubt.

Mr Puzey did not address us on this issue. We do not take that omission as a concession by him, on behalf of the Respondents, that the burden of establishing the amount of tax evaded rests on the Respondents in every case, but it seems to us that, in the absence of a challenge to Mr Smallwood's proposition, we must approach this particular case on that footing; and we can in any event see the attraction of the argument that the Respondents should be required to justify the magnitude of the penalty they have imposed and seek to have us uphold. We do not, however, accept Mr Smallwood's further contention that the Respondents must make out their case—in respect either of the assessment or of the penalty—beyond reasonable doubt. There is ample authority, recently reviewed and restated in Akbar (t/a Mumtaz Paan House) v Customs and Excise Commissioners [2000] STC 237, that the standard is the balance of probabilities, albeit "a high degree of probability".

Nor do we overlook the guidance to the tribunal given by the Court of Appeal in Pegasus Birds Limited v Customs and Excise Commissioners [2004] STC 1509, especially at [38], that its "primary task is to find the correct amount of tax, so far as possible on the material properly available to it." That guidance was given on the premise that the burden rested on the taxpayer; but even if the burden is reversed, it is in our view clear that our task is the same. Since—as the court stated in that case, although the same point has been made in many others—it is often impossible for the Respondents to establish an exact figure, we take the view that our approach in this case should be to ask ourselves whether, after making any adjustments to the assessments which the evidence available to us might support, the Respondents have satisfied us that the amount assessed, or the adjusted amount, represents a fair and reasonable estimation of the tax evaded: we do not need to be satisfied that the amount is accurate, even within a small margin of error. To require them to do more would be to demand the impossible.

The Inland Revenue investigations

Mr Scrymgeour was the Inland Revenue inspector in charge of the investigations which led to the settlement of the Appellants' income tax liabilities for the years from 1992 to 1997. They had been based in part on observations of trade at the restaurant, triggered by an officer's concluding that the gross profit disclosed by the Appellants' annual accounts was low, and inconsistent with that achieved by their competitors. At that time, as Mr Scrymgeour accepted, Revenue officers had little experience of such observations, which were being undertaken on an experimental basis, and in this case had taken place on only one day, 18 June 1998, inside the restaurant. Officers dined in pairs, one pair leaving as the next arrived, and collectively observing the entire day's trade. Mr Scrymgeour had not himself participated in the observations, but their results had been referred to him after another officer's initial analysis revealed grounds for concern. He then carried out further analyses of his own, and compared the results with the Appellants' own records, which included the meal slips on which customers' orders were written down. Although the meal slips did not record the number of customers sitting at each table, it was possible to work the number out with reasonable accuracy, Mr Scrymgeour concluded, from the food ordered. His analyses of the meal slips, compared to the observations of the numbers of customers who had eaten in the restaurant on that day led him to the view that there had been under-declaration of the turnover of the business in the Appellant's accounts, as they had been disclosed to the Revenue.

He then arranged a meeting with the Appellants and their accountant, a Mr D Greener. The Appellants were interviewed, not only without their being cautioned, but also not under the Hansard procedure since, Mr Scrymgeour said, he did not consider the matter was sufficiently serious to warrant such formality. He prepared a note of the interview which he handed to Mr Greener the following day, at a further meeting between Mr Scrymgeour and Mr Greener in the absence of the Appellants, when some additional details were discussed. Mr Greener later indicated, Mr Scrymgeour said, that the note fairly recorded the interview. On the next day, Mr Greener telephoned Mr Scrymgeour. The salient part of Mr Scrymgeour's note of the conversation reads:

"Greener rang as promised … He stated that he had spent most of the day with Mr & Mrs Ma and that they now wished to hold their hands up and confess to understated takings. Scrymgeour suggested that this was an appropriate course of action for the clients and Greener replied that they had no choice in face of the evidence against them."

There were subsequent discussions which led to an assessment. It was challenged by appeal to the General Commissioners, apparently directed only to the amount assessed, but ultimately a settlement was negotiated.

Mr Smallwood made a number of criticisms of the Inland Revenue investigations, some of which Mr Scrymgeour accepted—in particular, he agreed that one day's observations alone, especially when of an experimental nature, could not be regarded as anything more than an indication that something might be amiss—and we think there is some merit in the criticisms. We acknowledge too that even an honest trader, confronted with an assessment, may seek to compromise rather than fight it, however unjustified he might consider it to be, when by continuing a challenge he would risk being required to pay the whole amount assessed and incurring substantial irrecoverable professional fees. We are, however, satisfied that, even though conclusions of detail cannot safely be drawn from them, the Inland Revenue observations do support the Respondents' contention that the Appellants have understated the numbers of customers visiting the restaurant. We are satisfied too that Mr Scrymgeour's notes of his discussions are accurate and reliable, and that admissions of suppression were made, after the Appellants had taken professional advice, because there had in fact been such suppression; it is in our view most improbable that Mr Greener, who apparently had some experience of Inland Revenue investigations, would have made such an admission without instructions. We regard the settlement with the Revenue (and the earlier settlement, which we will need to mention again later) as evidence that suppression had taken place, and over a prolonged period; but we do not think we can read any more into the Inland Revenue's involvement.

The Customs and Excise investigations

We heard a great deal of evidence about the Customs officers' observations. We recognise that Mr Smallwood properly explored the evidence and we make no criticism of him for doing so; but the evidence was extremely repetitive and we see no purpose in our setting out more than a summary of it (with greater detail where appropriate) followed by our conclusions, since a recitation of what each witness said would add considerably to the length of this decision without contributing anything to its utility.

The observations (not including a preliminary reconnaissance and the purchase of a test meal) were carried out on six occasions, representing different days of the week and seasons of the year. Some were carried out from the roadway passing the front of the restaurant, by pairs of officers located in cars or vans parked on the opposite side of the road. Others were undertaken by officers who, like the Inland Revenue officers before them, ate meals in the restaurant, also in pairs, timing their arrivals and departures so that there was continuity of observation; the officers recorded only customers who arrived after they had themselves entered the restaurant. Most of the officers involved undertook both internal and external observations, often but not always on the same day. None of the officers had a clear recollection of the detail—understandably so after an interval of four or five years—but all had some live recollection, and were able additionally to rely on their notebooks and on the observation logs. The internal observations were recorded sometimes in the rough notes we have mentioned (scraps of paper, or the corners of newspapers) and transferred to notebooks as soon as possible (though not always immediately) after the officers left the restaurant. Sometimes the officers relied on memory alone, recording their recollections in their notebooks. The external observation logs were made up by the officers as the observations progressed. They also made brief notebook entries recording the fact of the observations, but nothing of substance turns on those. It is certainly unfortunate that some of the rough notes have been lost since one cannot be certain there were no errors of transcription but we accept, having heard the evidence and examined the notebook entries for ourselves, that in each case the officer making the note has done his or her best to provide an accurate record. Likewise we accept that the external observation logs were conscientiously compiled, and that they represent a reliable record of what the officers saw.

We are satisfied too, from the evidence we heard and from some photographs which Mr Smallwood produced, that the officers observing externally were able to do so from a position which afforded them a clear view of the entrance to the restaurant and that they were able to see and to record those entering and leaving the restaurant. We do not think there is any substance in Mr Smallwood's suggestion that the officers' concentration deteriorated, as time passed, to the extent that the reliability of the observations is called into question on that account. In undertaking the internal observations the officers were hampered by the fact that the restaurant has two dining rooms, and that it is impossible to see from either of those rooms into the other. We accept also that observation within the rooms presented problems, in that sometimes one of the pair of officers would not be able to see other customers without turning round in his or her seat, thus making it obvious that observations were being made. At lunchtime, only one room was used, but in the evenings, when both were in use, the officers' internal observations were necessarily incomplete, although on occasion there was a pair of officers in each of the rooms.

With the exception of three particular points, to which we will return, Mr Smallwood was able to do no more than show that the officers could have been mistaken. There were instances when the officers had recorded seeing customers arrive, while there was no record or them leaving, or vice versa; and in a few cases customers (as they were recorded to be) had remained for a remarkably long or short time. Or, he said, another interpretation of what was seen was possible—in particular, that some of those visiting the restaurant might have been incorrectly counted as customers. On some occasions, he said, the officers might have thought they saw a takeaway bag when the person concerned was carrying something else. The restaurant did not sell many takeaway meals—Mrs Ma discouraged them—and very few are recorded in the observation records; we are satisfied that if there were any errors in this respect, they were of negligible significance.

We have little doubt that there were some errors; it would be remarkable if there were not. Customs officers, even those with experience of undertaking observations, suffer from normal human fallibility and it is inevitable they will on occasion have misinterpreted what they saw, or have counted the number of people seen inaccurately, and that they may have made errors in writing down what was seen. It is in the nature of observations of this kind that they will not be wholly accurate; but, while we accept that some of those calling at the restaurant may incorrectly have been thought to be customers, we are sure it is at least as likely that some who were customers were not so recorded. The evidence was that the officers did not record visitors as customers unless they were sure. We accept that evidence; we were impressed with the standard of care taken by the officers in undertaking both the internal and the external observations. Overall, we think it more than likely that any errors which count against the Appellants have been balanced by errors in their favour. The officers told us, and we accept, that they were told only to record what they were sure they had seen; and, as some of them put it, they could not record what they had not seen.

The first of Mr Smallwood's particular points was that Mr Ma was in the habit of calling at the restaurant during the earlier part of the evening in order to supervise the kitchen staff, and remaining there for a variable length of time, before leaving in order to attend a local club, returning two hours or so later, shortly before the restaurant closed. We accept that this was indeed his habit. He might, it was suggested, have been thought by the externally observing officers to be a customer. We can dispose of this point quickly, since an examination of the observation logs, and of their later analysis, reveals that the suggestion is ill-founded; the logs show that the officers were able to determine that he was not a customer, and that he has not been counted as one.

Second, we heard evidence from Pui Hung Ma and from his mother that his friends frequently called on him at the restaurant, when he was working, and were provided with free meals, and that on one of the evenings of observation, which happened to be his birthday, a large group of friends had visited, had eaten a meal (without charge) and had gone on elsewhere, with Pui Hung, later in the evening. The friends, it was said, must have been counted as customers, with the consequence that the number of meals the Respondents thought had been sold on that day was exaggerated.

Thirdly, we were told, one of the Appellants' sons, Mak, lives in a flat over the restaurant and their daughter, who works as a teacher elsewhere but returns to Sunderland at the weekends and in school holidays, stays in the flat, to which access is gained through the entrance door to the restaurant. In their comings and goings, too, they might have been mistaken for customers. Mr and Mrs Ma have two sons, the younger of whom (Pui Hung, from whom we heard evidence) works full-time in the restaurant. The other—the son who lives above the restaurant—appears to work there on an occasional basis, though quite how often, and in what capacity, did not become entirely clear; we did learn that he has other full-time business interests. He also has a somewhat conspicuous and unusual appearance. It became apparent that the Customs officers, too, were unsure of his role. They were aware of his conspicuous appearance and that he sometimes worked in the restaurant, but apparently did not know that he lived above it until they had carried out a few days' observations, and they were evidently ignorant of the daughter's visits.

We reject these contentions. We think it improbable that Pui Hung's friends would visit him at the restaurant when he was working there. We likewise think it improbable that in a busy restaurant, as this clearly was (and when, as Mrs Ma said, advance booking was always recommended in the evening), the Appellants would be willing—even without providing them with free food—to allow their son's friends to occupy tables which instead could be occupied by paying customers. More conspicuously, the claim that there was a large group of friends eating in the restaurant on the evening of Pui Hung's birthday (which we accept did coincide with one of the days of observations) is inconsistent with the observation records for the evening, which do not match the claim in any respect. The manner in which Pui Hung and his mother gave evidence on this subject was evasive, inconsistent and unconvincing and we are satisfied that the claim has been manufactured in order to provide some explanation for the difference between the number of customers observed, and the number shown by the Appellants' records. We think also that there is little risk that the other son has been mistaken for a customer; his conspicuous appearance alone indicates otherwise. Although the officers were not aware from the outset that he lived in the flat, they evidently knew that he was a member of the family, who worked occasionally in the restaurant. We have concluded, too, that there is little likelihood that the Appellants' daughter has erroneously been counted as a customer; she too was seen working in the restaurant and was accordingly counted as a member of staff. On the last day of the observations, realising that errors were possible, the Respondents undertook simultaneous internal and external observations, the results of which showed that the external observers had been able to distinguish between customers and others without great difficulty.

The Respondents have satisfied us that, despite possible individual errors, the observation records are, overall, reliable. We accept, as we have said, that some errors were almost certainly made—but that is not, in our view, sufficient. This is not a case in which we are required to treat any but the most trivial mistake as a factor fatal to the assessment, nor even to resolve every doubt in the Appellants' favour. Rather, we are required to be satisfied that, on balance (though to a high standard) the observations give a reasonably accurate impression, on which reliance can properly be placed by an officer making an assessment and imposing a penalty, of the numbers of customers. We were particularly impressed by the fact that, at lunchtimes when (as the Appellants claim and the Respondents accept) no suppression occurred, the observations and the declarations were in very close agreement; sometimes the figures matched exactly, while on other days the figures differed very little. By contrast, in the evenings there were invariably large differences, the declared customers being always substantially fewer than those observed. The difference is too large to be accounted for by error. We are satisfied that, so far as there were errors in over-recording customers, they were at least matched by errors in under-recording, that the observation records, overall, are reliable, and that there is no significant danger that the number of customers has been over-estimated.

It was argued that the observations, even if they accurately measure the number of customers, nevertheless overstate the likely sales because insufficient account was taken of the sharing of meals by customers. Mrs Ma's evidence was that customers commonly shared meals, and that she even encouraged regular customers to do so; the restaurant's policy was to serve large portions and when she knew that the customers would not eat an entire meal each, she suggested that larger parties should order fewer meals than one per person. Mr Lish, who had at one time been the Appellants' accountant (and who had dealt with the 1991 settlement with the Inland Revenue) but was now retired, told us that he and a group of other retired people were regular customers, visiting the restaurant on birthdays and similar occasions. At Mrs Ma's suggestion they had begun ordering fewer meals than there were members of the party, and some might eat a starter in place of a main course. It was also suggested that children would often share their parents' meals, and would not eat one of their own.

We do not think there is any merit in this complaint. We think it inherently improbable that any restaurateur would deliberately sell fewer meals than customers were willing to order though we accept that some customers, with children or with small appetites, might share. But the Appellants undertook an exercise of their own, analysing the numbers of customers (including children) who shared meals. It revealed that fewer than eight per cent of meals were shared, and Miss Hewitt made an allowance of that amount in her calculations (in the process revising the allowance she had already made for children). We are not persuaded that the sharing of meals was extensive, and we certainly see no basis on which it could properly be said that a greater allowance than the Appellants' own observations show is adequate should be made.

We have already commented that we have found the interviews of little help. Some admissions were made, but none went further than the admissions made by the Appellants in their defence and in their evidence. While the observations were still in progress, Mr Martin made a control visit, initially to the Appellants' accountants and thereafter to the restaurant, in the course of which he collected their trading records. These were in good order; the meal bills for each day were retained, together with the till roll, which agreed with the takings figure recorded in the Appellants' accounting records. If there was suppression, therefore, the Appellants must have been failing to enter some of their sales into the till (which, at the interviews, they accepted they had done). Miss Hewitt made a comparison of the meal bills with the observations and prepared some figures which were put to the Appellants at the interviews although, for reasons which did not become clear, they were unwilling to discuss them. It is right to record that they did admit some suppression at an early stage in the interviews, and gave some information about the amount they had suppressed, when they had done so, and for what reason; they repeated those admissions in their evidence, which we shall outline shortly.

Mr Smallwood did not attack Miss Hewitt's calculations themselves, having concentrated his fire on the reliability of the observations and the allowance for the sharing of meals, but he did point out that if the assessment, even as reduced, were correct, the Appellants must have suppressed takings of about £100,000 per year. That, he said, was an improbable figure which we must examine with care, not least because it substantially exceeded the suppression assumed by the Inland Revenue assessments. He challenged also the assumption that there had been suppression over the whole period now assessed (some nine years), contending that the suppression had been limited to the two periods we have already mentioned.

It is, we think, a little difficult for us to take account of the Inland Revenue investigation when it suits the Appellants for us to do so, while ignoring the investigation when it does not. For the reasons we have already given, we are content to leave out of account, despite Mr Puzey's argument to the contrary, the fact that there was only a modest difference between the Revenue's estimation of the proportion of sales which had been suppressed, and that achieved by Miss Hewitt; but by parity of reasoning we must leave out of account the detail of the settlements ultimately made between the Appellants and the Revenue. At the risk of repeating ourselves, we take into account, as corroboration of the fact and continuity of suppression, that there have been two settlements, but we pay no more heed than that to the Inland Revenue investigations. Nevertheless, we can see the force of Mr Smallwood's argument that the difference between the assumed and the declared takings is substantial, and we will deal at a later stage with our conclusions on the plausibility of the amount assessed.

The explanation given by, particularly, Mrs Ma of the admitted suppression was that it had occurred to enable the Appellants to meet unusually heavy domestic expenditure. Mr Ma had committed a motoring offence which was expected to, and did, result in his disqualification. The commission of the offence coincided approximately with Pui Hung's becoming 17, and it was decided to pay for an intensive course of driving lessons in order that he could pass his test and become the family chauffeur. We were provided with some documentary evidence showing that Pui Hung took a large number of lessons in quick succession, and that he passed his driving test; his own evidence dealt with the same point. Secondly, it was claimed, the Appellants had assisted their daughter financially when she bought a house in Bradford, where she had obtained employment, and they suppressed their takings to enable them to do so. There was no documentary evidence to support the latter claim.

We are not satisfied that the cost of the driving lessons was the cause of suppression. We observe that, on the Appellants' own admission, the first period of suppression began on 1 November 1997, almost five months before Pui Hung's birthday. Even if we treat it as an admission that the suppression started at some time during the prescribed accounting period which began on that date, the explanation is unconvincing. We are similarly unconvinced by the claim that the later admitted suppression was motivated by the Appellants' daughter's purchase. It was claimed that the suppression stopped when the Appellants decided instead to increase their drawings; it was not explained why that obvious expedient was not adopted when (if it was true at all) the Appellants had more than usual need of money. We find very much more persuasive the coincidence between the admitted periods of suppression and the observations, first by the Revenue and later by Customs; we agree with Mr Puzey that it is too much to believe that suppression occurred only when observations were in progress, and on two separate occasions. We are, in fact, satisfied that Mr Puzey's theories about the suppression (to which we shall come shortly) are probably correct.

Mrs Ma explained, during the interviews and in her evidence to us, that when friends ate at the restaurant, she discounted the price to some extent and, if the bill was paid in cash—which she encouraged, without insisting—the money was not rung into the till, and the sale was concealed. The opportunity to suppress takings by this means was taken when it arose, during the two periods, but it did not arise frequently, and the scale of suppression was never more than £350 in any week; on average it was much lower, and in the earlier period it had not exceeded £150 per week. We do not believe that evidence. Mrs Ma claimed that friends ate at the restaurant infrequently—so much so that, if her evidence on that score had been correct, it would have been impossible to achieve even the admitted suppression of £150 per week. On this issue, as on others, we found both Mr and Mrs Ma to be unsatisfactory witnesses. We have no doubt that they were untruthful, and that no reliance can be placed on what they told us.

Two facts which the Respondents accept are, in our view, of particular significance: that the retained meal bills matched the till rolls, and that the bills recording the meals purchased by the Customs officers were all found among the retained bills. Mr Puzey's explanation, which we are satisfied is right, is that Mrs Ma, having learnt from the Revenue investigation that tax officers make test purchases in order to ascertain whether their purchases are declared, decided thereafter to take all customers' orders herself (which she conceded she did) and to suppress those of people whom she knew, as friends or regular customers, and who she could safely assume were not tax officials. She took no risks with customers whom she did not know.

Her practice, she said, was to write down customers' orders on a notepad and then transcribe the order to a meal bill. She could provide us with no satisfactory explanation of that laborious process; again, her evidence was evasive and unconvincing. We are satisfied that the purpose was to enable her to ensure that there was an unbroken series of sequentially numbered meal bills. Whether, as Mr Puzey suggested, the bills were rewritten, or there were two pads, one for bills which were to be declared and the other for bills which were to be suppressed, is immaterial. We are in no doubt that Mrs Ma recorded orders in a manner which made it possible to ensure that the till roll matched the retained meal bills, while there was no surviving record of the suppressed sales.

It became clear from the evidence that only members of the Appellants' family used the till; members of staff neither took orders nor accepted customers' payments (or, if they did, handed the payment to a member of the family for entry into the till). There were, however, some occasions when the Appellants were on holiday and, rather than close the restaurant, it was necessary to make other arrangements. Mr Bowes' evidence, as it was set out in his statement, was that he had been the Appellants' bank manager for some years before his retirement, and had become friendly with them to the extent that he had managed the restaurant for them, while they were on holiday, for a number of periods of which the last was in 1993 (when Pui Hung was 12: we do not know the ages of his brother and sister although they are evidently a little older). It became apparent from Mrs Ma's evidence, however, that Mr Bowes had done little more than cash up the till at the end of the day's trade, and enter the appropriate figures in the Appellants' accounting records.

Mr Puzey did not suggest, nor do we think it at all likely, that Mr Bowes was party to any deception. Mr Smallwood argued that there could not have been suppression when Mr Bowes was present and that we should eliminate those periods from the assessment. However, if, as we have concluded, he merely cashed up at the end of the day's trade Mr Bowes' evidence does not eliminate the possibility that the suppression was effected by the family prior to his arrival, by not keying certain sales into the till—the practice adopted by Mrs Ma when she was present. We observe too that Mr Bowes was managing the restaurant for only about four weeks during the period assessed, and that there is no material difference between the takings recorded in those four weeks and those recorded at other times. We have concluded that Mr Bowes' involvement is, at most, of marginal relevance.

Conclusions

In order to persuade us that the assessment should be upheld, the Respondents must show that there has been suppression, that the available evidence supports an assessment covering a period of nine years, that the suppression has been at least reasonably consistent over that period, and that the amount assessed, though inevitably not accurate, is fair and reasonable. We are satisfied that they have succeeded in doing so.

Some suppression is admitted. The only evidence that it was limited to two comparatively short periods comes from the Appellants whom, as we have already indicated, we do not accept as credible witnesses. We reject as implausible the contention that suppression occurred only when either the Inland Revenue or Customs and Excise were undertaking investigations; rather, we think Mr Puzey is right in his argument that the Appellants have admitted only as much as they have been compelled to admit when faced with incontrovertible evidence, and that the inference to be drawn is that there has been consistent suppression for many years.

Observations were undertaken by Customs and Excise on a total of six days, extending from April 2000 to May 2001. The results of the observations, though showing differences from one day to another, are reasonably consistent. Mr Smallwood attacked the reliability of the observations—an attack we have largely rejected—but did not challenge the interpretation placed on them, or the arithmetic of the assessment. In our view there is nothing objectionable in extrapolating backwards from observations undertaken over a reasonably lengthy period of time, in the absence of credible evidence that suppression began only at a particular point (and, since we have rejected Mrs Ma's evidence on the point, there is none here). Any residual objection there might be is in any event to be set against the corroborative value—and we regard it as no more—of the settlements with the Inland Revenue, relating to suppression over very much the same period.

The Respondents have calculated the assessment by assuming a uniform rate of suppression over the relevant period, contending that there is no evidence (such as conspicuous fluctuations in the Appellants' declarations) to suggest that suppression was at a variable or an increasing (or decreasing) rate. An analysis of the proportions of the takings represented by cash (which could readily be concealed) and other payment methods respectively, comparing the periods when suppression was admitted and denied, does not bear out the contention that suppression was limited as the Appellants claim. We merely comment that we were impressed by the thoroughness of Miss Hewitt's calculations. Apart from the evidence which we have rejected, that suppression occurred only during two periods, Mr Smallwood advanced no arguments which might persuade us that suppression was limited, and we are satisfied that the Respondents' approach was reasonable.

We have already remarked that the evidence showed that this was a busy restaurant. The declared takings in the latter part of the period assessed were about £300,000 per year; the assessment assumes that they were in reality about £400,000 per year, or £8,000 per week. We cannot say whether that is a reasonably attainable figure for a restaurant of this kind—we had no appropriate evidence on the matter, and have no expertise of our own—but it is plain that turnover of that level was achieved during the periods of observation, and there is nothing before us to suggest that the takings then were unusually high, nor why they might have been out of the ordinary. We see no reason to suppose that the turnover assumed by the assessment was not achievable.

Since the arithmetic of the assessment was not disputed, there remains nothing on which we might direct an adjustment, and we accordingly dismiss the appeal against the assessment.

The penalty

Dishonesty was conceded, though only for those periods in which suppression was admitted. Mr Smallwood did not suggest that there was any explanation other than dishonesty for any further suppression of which we might be satisfied—nor, realistically, could he have done—and we have concluded that the Respondents have established dishonesty throughout the period for which the penalty was imposed. Mr Smallwood argued that the measure of cooperation given by the Appellants was greater than that for which they had been given credit, and that we should increase the mitigation. We do not accept that argument. We agree with Mr Puzey that the Appellants have admitted no more than they could not dispute; they have made no real effort to establish the correct amount of tax, still less have they made a full admission, and they have shown no remorse. We are quite sure they were not truthful witnesses. While we do not think we should go so far as to cancel any part of the mitigation which has been allowed, we are entirely satisfied that we should not increase it.

The appeal is, therefore, dismissed in its entirety. As is usual in cases of this kind, Mr Puzey sought a direction in the Respondents' favour in respect of costs, which we make. We add that our decision, in all respects, is unanimous.

COLIN BISHOPP

CHAIRMAN

RELEASE DATE: 6 July 2005

MAN/02/0113

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