United Kingdom VAT & Duties Tribunals Decisions

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Cite as: [2006] UKVAT V19491

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Cun (t/a Kung Fung Takeaway v Revenue and Customs [2006] UKVAT V19491 (09 March 2006)

 


Cun (t/a Kung Fung Takeaway v Revenue and Customs [2006] UKVAT V19491 (09 March 2006)

19491

VAT ASSESSMENT – Chinese takeaway – suspected suppression of sales figures – Respondents decide on a suppression rate of 54.04 per cent derived from test purchases and observations during a ten month period –Appellant admits suppression but at a lower rate – Appellant's calculations unconvincing – Respondents suppression rate based on firm evidence – Appeal dismissed – Assessment in the sum of £44,422 plus interest upheld – Order for costs made against the Appellant for misusing Tribunal procedure by deliberately not attending the Tribunal.

MISDECLARATION PENALTY – Appeal dismissed in consequence of dismissal of the substantive Appeal

LONDON TRIBUNAL CENTRE

MR SAY QUAY CUN T/A KUNG FUNG TAKEAWAY Appellant

- and -

HER MAJESTY'S REVENUE and CUSTOMS Respondents

Tribunal: MICHAEL TILDESLEY OBE (Chairman)

SHAHWAH SADEQUE MBCS (Member)

Sitting in public in London on 19 December 2005

The Appellant and his representative Michael Feng did not appear.

Pauline Crinnion, Advocate for HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2006

DECISION

The Appeal

1. The Appellant was appealing against an assessment for unpaid VAT in the sum of £44,422 plus interest for the periods 1/01 to 7/03 inclusive. The assessment was dated 30 January 2004.
2. The ground of Appeal in the Notice of Appeal dated 5 July 2004 stated that

"The reviewing officer failed to pay proper cognisance to the facts provided by the Appellant and upheld the assessment in full".

3. The Appellant was also appealing against a misdeclaration penalty in the sum of £5,113 issued on 19 October 2004. The two Appeals were consolidated on 22 December 2004.

The Issue

4. The Appellant was the sole proprietor of a Chinese takeaway which operated from premises at 23 Jeffrey Street, Gillingham, Kent. The Appellant sold the business in October 2004.
5. The principal issue in dispute was the suppression rate of 54.04 per cent applied by the assessing officer in calculating the amount of VAT due. The Appellant admitted that he had suppressed sales. He contended, however, that the officer calculated the suppression rate of 54.04 per cent on partial information and was, therefore, too high.
6. The onus was upon the Appellant to demonstrate on the balance of probabilities that the assessment was excessive.
7. The primary task of the Tribunal was to find the correct amount of tax due so far as possible on the material properly available to it.
8. The outcome of the misdeclaration penalty Appeal would depend upon our decision on the substantive Appeal against the assessment.

The Hearing

9. Mr Hawkins of the VAT Practice originally represented the Appellant and submitted the Appeal on the Appellant's behalf.
10. In October 2005 the Appellant appointed Michael Feng, as his new representative.
11. The Appeal was listed for a three day hearing.
12. In November 2005 Mr Feng notified the Respondents that the hearing would be for one day and that his client would not be attending the hearing to give evidence. Mr Feng supplied the Respondents with a skeleton argument.
13. Mr Feng and the Appellant did not attend the hearing on 19 December 2005. No substantive reason was given for their non-attendance, despite the Clerk to the Tribunal contacting Mr Feng on the day of the hearing.
14. We decided to grant the Respondents' application to hear the Appeal in the absence of the Appellant in accordance with Rule 26 of the Tribunal Rules 1986. We took this action because:

(1) The Appellant and his representative had been notified of the hearing.

(2) They gave no substantive reason for their non-attendance.

(3) The Assessment was almost two years old.

(4) The Appellant's case was set out in his skeleton argument which was before the Tribunal.

The Evidence

15. We heard evidence from Keith McCann, the officer who was responsible for calculating the suppression rate and the assessment and from Dominic Farnfield who carried out the review and reconsideration of the assessment.
16. We received in evidence the witness statements of the following officers who had been involved in the surveillance of the Appellant's premises:

(1) Alison Dunford

(2) Roderick Livingstone

(3) Christopher Prin

(4) Marten Medhurst

(5) Peter Clifford

(6) Desmond Lewis

(7) David Ranger

17. The Appellant had been served with the statements and made no objections to the receipt of them in evidence.

The Facts Found

18. In July 2000 the Appellant purchased as a going concern the business of a Chinese restaurant, known as Peking Garden Restaurant, operating from 23 Jeffrey Street, Gillingham, Kent. The Appellant decided to run the business as a Chinese takeaway rather than as a restaurant. The Appellant was registered for VAT with effect from 16 July 2000.
19. On 24 September 2002 the Respondents obtained authority to carry out a surveillance of the Appellant's business. The Respondents suspected that the Appellant had suppressed the turnover of the business resulting in an under declaration of VAT. Their suspicions had been aroused by a comparison of the Appellant's VAT returns with the returns for similar businesses in Gillingham. The comparison revealed that the Appellant's returns were low for similar establishments in the highly populated area of Gillingham.
20. On 27 September and 9 November 2002 test purchases of takeaway meals were carried out by four officers on each evening at specific times commencing at 1700 hours when the takeaway opened and finishing at around 2350 hours when the takeaway closed. Their orders were recorded by the takeaway assistant on an order pad slip pre-printed with a black number identifying the order pad book and a red number which was sequential and identified the individual order slip. The officers made a note of the black and red numbers and the price paid for their test purchases. The officers observed the takeaway assistant following the same recording procedure for telephone orders and serving other customers in the takeaway. The assistant placed the money received for the orders in a blue cash box situated behind the counter. The Appellant did not use a cash register till for recording the sales.
21. Mr McCann, the officer in charge of the surveillance operation, using the information gained from the test purchases estimated that the Appellant's daily sales of takeaway meals would be in the region of £900 - £1,000 which was significantly higher than the value of the sales declared in the Appellant's VAT returns. Mr McCann, however, decided not to raise an assessment at this stage but instead to carry out further investigations of the Appellant's business.
22. On 1 February 2003 Mr Prin carried out a routine control visit of the Appellant's business. The officer was not privy to the details of the test purchases and was instructed to obtain details of all transactions for 27 September and 9 November 2002. The officer ascertained that the Appellant kept a takings sheet based on the numbered order pads and the sheet was given to the Appellant's accountant to compile the VAT account and return.
23. Mr McCann could find no record of the test purchases on 27 September and 9 November 2002 on the respective daily transaction sheets kept by the Appellant and taken by Mr Prin.
24. In the light of this additional information Mr McCann decided to conduct further surveillance operations of the Appellant's business. These operations consisted of test purchases and observations throughout the opening hours of the premises at its front and rear on 17 February 2003 (Monday) and 22 March 2003 (Saturday). The purpose of the observations was to obtain accurate information about the precise number of orders taken in any one day by the Appellant. On 17 February the officers observed 59 sales including deliveries and on 22 March 2003, 106 sales. Mr McCann with his officers performed another test purchase on 4 June 2003 (Wednesday). The officers observed that the Appellant's staff continued to record the sales on the order books but on 4 June 2003 they observed the use of two different order pads. The officers made a record of the order book and slip numbers of their purchases.
25. Mr McCann decided to carry out a routine control visit of the Appellants premises with another officer, Mr Lewis, which was done on 4 November 2003 in the presence of the Appellant's accountants. The Appellant explained his system for taking orders and recording the receipts for takeaway meals. He confirmed that there was one order per customer which was in duplicate. The member of staff taking the order retained the top copy; the other copy was given to the kitchen. The order books consisted of 50 order slips. The member of staff would cash up at the end of the day, reconciling the amount of cash with the amount recorded on the bills. The daily cash total would be recorded on a yellow post it note which was then transferred to a list entitled daily gross takings by the Appellant. This list would be given to the Appellant's accountants who would prepare the VAT return from the information given.
26. The Appellant's business records were examined which revealed discrepancies between the records and the officers' accounts of their observations and test purchases. Essentially the number of sales recorded by the Appellant in records were considerable lower than the number of sales deduced from the officers' observations and their test purchases. The Appellant offered no explanation for the discrepancies. On 5 November 2003 Mr McCann uplifted the Appellant's meal bill records for 2002, for which he gave receipt.
27. Mr McCann compared the number of customers observed during the five days of the surveillance exercise with the declared number of customers on the Appellant's business records to produce a suppression rate of 54.04%. His analysis is set out in the table below.

Date	Day	Observed No. of Customers	Declared No. of Customers	Declared Takings (£)	Average Bill Value (£)	Estimated Taking Using Bill Average (£)	Suppression Rate
27/9/02	Fri	94	40	406.35	10.16	954.92	57.45
9/11/02	Sat	93	43	514.25	11.96	1,112.22	53.76
17/2/03	Mon	59	19	175.15	9.22	543.89	67.80
22/3/03	Sat	93	53	566.50	10.69	994.05	43.01
4/6/03	Wed	60	27	241.95	8.96	537.67	55.00
Total		399	182	1,904.20	10.46	4,142.74	54.04

28. On 5 November 2003 Mr McCann sent a letter to the Appellant advising him that the Respondents had carried out a surveillance operation which indicated that the business takings declared by the Appellant were significantly understated. The Appellant was invited to provide the Respondents with a schedule of under-declared takings within 14 days from the date of the letter. The Appellant did not respond to the invitation. On 28 November 2003 Mr McCann sent another letter where he advised the Appellant that he would be issuing an assessment for £44,422 in respect of the period 1 November 2000 to 31 July 2003 inclusive. Schedules quantifying the proposed assessment were enclosed with the letter.
29. There followed a series of letters exchanged between Mr Hawkins, the Appellant's first representative, and the Respondents. Mr Hawkins requested a delay in the issue of the assessment which was granted. The assessment was eventually issued on 30 January 2004.
30. On 2 January 2004 Mr Hawkins wrote a letter to the Respondents in which he stated that the Appellant accepted that not all sales had been recorded. Further the Appellant was unable to understand the levels of omissions that the observations indicated.

The Appellant's Case

31. The Appellant's first representative produced alternative calculations of the VAT owed based on a suppression rate of 19.25 per cent (15 March 2004) which was revised downwards by Mr Hawkins on 26 April 2004 to 14.6 per cent. Mr Hawkins calculated the suppression rates on information provided by a time and motion study of the Appellant's activities.
32. Mr McCann and Mr Farnfield, the Review officer, considered the information supplied by Mr Hawkins. However, they rejected the information and upheld the original assessment. Their reasons were as follows:

(1) The information contained several inconsistencies relating to the time available to prepare meals.

(2) The calculations showed a significant difference in tax under declared to the extent that the Appellant was asserting that VAT had been overpaid in some accounting periods.

(3) The utilisation times used were not credible in that the time taken to prepare the number of orders observed by the officers did not match against the time claimed by the Appellant to cook an order.

33. On 20 October 2005 the Appellant made a declaration that he did not suppress the sales figures from July 2000 to October 2000. Thereafter he carried out a staged suppression of sales figures starting at 5 per cent, rising eventually to 35 per cent by July 2003 which produced undeclared VAT in the sum of £11, 777. The Appellant admitted that he suppressed the small bills and declared the higher ones.
34. The Appellant's second representative, Mr Feng, provided the Respondents with a copy of a skeleton argument which set out the Appellant's case for challenging the assessment of £44,000. The skeleton argument contained a list of eleven questions which would have been put to Mr McCann if Mr Feng had attended the hearing on 19 December 2005. The Tribunal put the questions to Mr McCann.
35. Essentially the questions revolved around three issues. The first concerned whether Mr McCann had direct evidence of a 54.4 per cent suppression rate of sales in the period from July 2000 to July 2002 which preceded the surveillance operations. Mr McCann accepted that he had no direct evidence of suppression and that he had projected back the 54.04 per cent suppression rate to the date when the business opened. Mr McCann did not consider the Appellant's statement of a staged suppression rate plausible. He pointed out that a staged rate of five per cent at the beginning ending with the 54.04 per cent rate for the ten month surveillance period would result in the Appellant's business growing by 200 per cent in the space of 33 months which in his view was not credible.
36. The second set of questions concerned the previous use of the takeaway premises as a public house. Mr Feng contended that the customer base for the public house was different from that for a Chinese takeaway. Thus when the takeaway opened the Appellant did not have an established customer base to guarantee him a regular income, which would restrict his scope to suppress the takings. Mr McCann questioned the accuracy and the relevance of Mr Feng's contention. The Appellant took over the business of a Chinese restaurant, not a public house. The restaurant clientele provided an ideal customer base for the Appellant's business since many Chinese restaurants offer takeaways as well as sit down meals.
37. The third set of questions challenged the accuracy of the test purchases. Mr Feng indicated that a suppression rate based on takings for Fridays and Saturdays would be higher than if based on takings for a weekday. Mr McCann was baffled with Mr Feng's assertion. The test purchases and observations were carried out on a Monday and a Wednesday as well as at weekends. Further the suppression rate for the weekdays was higher than that for the weekends.

Reasons for Our Decision

38. Section 73 (1) of the Value Added Tax Act 1994 gives the Respondents the power to make assessments for unpaid VAT to the best of their judgment if it appears to them that the returns are incomplete or incorrect.
39. The Respondents were entitled to make an assessment in view of the Appellant's admission that he suppressed the sales figures for his takeaway business. Thus the issue in dispute was the suppression rate. The Respondents contended that the rate was 54.04 per cent, whereas the Appellant suggested a lower suppression rate based upon a staged course of conduct where he increased the suppression rate with the rise in takings. The onus was on the Appellant to demonstrate on the balance of probabilities that the suppression rate was lower than the 54.04 per cent rate adopted by the Respondents.
40. We have examined the various submissions of the Appellant. We did not consider that the proposals put forward by the Appellant's first representative were plausible. We found that there were inconsistencies between the suggested time to prepare meals and the actual opening hours of the business. We accepted the Respondents' reservations about the utilisation times and the calculations which would have resulted in the Appellant receiving repayments of VAT for specific quarters.
41. The Appellant's later submission that he staged the suppression in line with the increase in his takings was in our view equally implausible. His submission was predicated on the basis that he started with a nil or a much reduced customer base. This was not so. He bought a Chinese restaurant as a going concern for which he paid a sum for goodwill which suggests that there was already a transferable customer base for Chinese takeaways. Further, the Appellant's calculations for the staged course of suppression yielded a 200 per cent increase in takings over a period of 33 months. Such a growth rate was unrealistic and undermined the credibility of his submission.
42. The Respondents' suppression rate of 54.04 per cent, on the other hand, was based on firm evidence of test purchases and observations which took place on different days. The test purchases were spaced at intervals during the opening hours of the takeaway with separate purchases at the start and end of the opening hours. This method enabled Mr McCann to form an accurate assessment of the number of customers using the takeaway on the specific days in question. The observations were thorough in their execution with sufficient officers located at the front and rear of the premises to provide a reliable count of the number of customers in person and deliveries. We are satisfied that the surveillance operation over five days produced an accurate reflection of the Appellant's business during the ten month period it was conducted. The estimated suppression rates for each of the five days were similar and within an acceptable range of variation.
43. We are satisfied that Mr McCann was justified in projecting back the suppression rate to cover the period ending 31 January 2001 to the date the surveillance operations began. The projection preserved the 47 per cent growth in the turnover over the 33 month period to the end of the assessment period. This rate of growth was more realistic than the 200 per cent postulated under the staged course of suppression. Further we consider it likely that the Appellant adopted a consistent pattern of suppression in view of his reluctance to disclose the method by which he suppressed the sales figures. His admission concerning the staged course of suppression took place almost two years after his interview with Mr McCann which had the character of a calculated response by the Appellant to limit his liability for unpaid VAT.
44. The Respondents did reconsider their assessment in the light of the information provided by the Appellant's two representatives. We consider that they reached the correct conclusion that this information did not challenge the assessment based on a suppression rate of 54.04 per cent.

Decision

45. We conclude for the reasons set out above that the Appellant has failed to satisfy us on the balance of probabilities that the assessment dated 30 January 2004 in the sum of £44,422 was inaccurate. We are satisfied on the evidence that the Respondents were justified in applying a suppression rate of 54.04% and that the resulting amount of tax owed in the sum of £44,422 was the correct amount of VAT due.
46. We, therefore, dismiss the Appeal and uphold the assessment in the sum of £44,422 plus interest.
47. As a consequence of our dismissal of the substantive Appeal, we dismiss the Appeal against the misdeclaration penalty issued on 19 October 2004 in the sum of £5,113. We order the Appellant to pay the penalty.
48. We consider that the Appellant and his representative made a conscious decision not to attend the Appeal hearing which in our view amounts to a misuse of the Tribunal procedure and constitutes grounds to depart from the general rule not to award costs against an unsuccessful litigant. We, therefore, order the Appellant to pay costs of £100 which represented the travelling expenses of the officers who were required to attend the hearing to give their evidence.

MICHAEL TILDESLEY OBE

CHAIRMAN

RELEASE DATE: 9 March 2006

LON/04/1081