United Kingdom VAT & Duties Tribunals Decisions

You are here: BAILII >> Databases >> United Kingdom VAT & Duties Tribunals Decisions >> Gio's Bar Ltd v Revenue & Customs [2008] UKVAT V20573 (22 February 2008)
URL: http://www.bailii.org/uk/cases/UKVAT/2008/V20573.html
Cite as: [2008] UKVAT V20573

[New search] [Printable RTF version] [Help]

Gio's Bar Ltd v Revenue & Customs [2008] UKVAT V20573 (22 February 2008)

20573

Value Added Tax – Assessments in respect of under-declarations of gross takings of a wine-bar – the requirement of best judgment on the part of the HMRC officer making the assessment and the burden of proof on the Appellant to demonstrate that the Assessment was wrong or excessive - Appeal dismissed

LONDON TRIBUNAL CENTRE

GIO'S BAR LIMITED Appellant

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Tribunal: HOWARD M NOWLAN (Chairman)

ELIZABETH MACLEOD, CIPM

Sitting in public in London on 11 and 12 February 2008

Barry Holman of B W Holman & Co, accountants, for the Appellant

Richard Smith, counsel, for the Respondents

© CROWN COPYRIGHT 2008

DECISION

Introduction

This was a case where HMRC imposed additional assessments on the Appellant company in the total sum of £15,141.04 for the VAT periods 04/04 to 07/05, on account of alleged under-declarations of turnover at the Appellant's wine-bar in Chingford, Essex.

We were naturally given the facts on which, and the assumptions by reference to which, the HMRC officer had calculated the alleged under-declaration of turnover. We both considered that the officer had proceeded correctly and fairly in making these calculations. Save for the extrapolation of figures from one period and the percentage level of under-declaration in that period to arrive at the figures for the different six VAT periods in dispute, the assessment was based not so much on estimates but simply on taking the Z readings from the Appellant's tills.

The Appellant contended that the declared figures were the correct ones, and that that the Z readings taken from the tills were simply wrong. We accept that the Appellant and the Appellant's staff had problems with the tills but we were not given any satisfactory evidence as to what errors the tills were generating, or any evidence at all to support the figures of turnover that had actually been declared. Nor were we given any evidence to suggest that the VAT period, taken as the sample period, was unrepresentative and that the problems encountered in that period did not occur in the other later periods, namely the six periods for which the assessments were made.

There was no allegation of fraud on the part of the Appellant company, or Mr. Falco (the owner and director of the company) or on the part of his daughter Jane Falco who was effectively the manageress of the wine-bar. For our part we also confirm that we had no reason to doubt the evidence given by either Mr. Falco or his daughter. In the light of this we admit that we are at a loss to say or even to suggest what actually happened in this case, and how it is that the declared figures of gross turnover were about 32% lower than those taken from the Z readings, with only a few minor further assumptions being made to arrive at the alleged correct turnover figures. Since however we cannot criticise the approach taken by the HMRC officer, and indeed we think we have to commend him for taking a fair approach in dealing with the calculations, and since we have been given no remotely convincing evidence to doubt the calculations or on which other calculations might be made, we have to dismiss this Appeal.

The evidence

Evidence was given by Mr. Falco, and by the HMRC officer, Mr. Neil Cousin, who had prepared all the calculations. Towards the end of the first day of the hearing, we both decided that it was important to seek further evidence from Mr. Falco's daughter, Jane Falco, who had managed the wine-bar during the relevant period. Thus on the second day of the hearing Jane Falco was fortunately able to attend and to give evidence.

The facts in more detail

Background facts

Mr. Falco had initially conducted the wine-bar trade either in person or in partnership prior to transferring it as a going concern to the Appellant company. The business appears however to have been conducted in an identical manner before and after the pure change of technical operator.

Mr. Falco admitted that although he had other property interests he was not experienced at running a business such as a wine-bar. He also admitted that the business of wine-bars (doubtless along with pubs and restaurants) could be significantly affected by "fashion", at one point being very popular, and later being out of favour. He admitted that the whole wine bar venture had not been a success. Fairly shortly after the periods in contention, the wine-bar had apparently closed, it being impossible to sell it at any price on a "going concern" basis.

We were told that there had been an earlier VAT inspection at the wine-bar in which a different HMRC officer had alleged that there were under-declarations of turnover. That inspection has led to assessments that are currently under appeal and for some curious reason we were told that the present case in respect of later periods of assessment had come on for hearing before the case in respect of the earlier periods. We were naturally not concerned with the facts and arguments in the other and earlier case though we should mention two relevant points. Firstly, it was clearly stated that the points in the earlier case also revolved around the fact that the Z readings taken from the tills by the VAT officer exceeded the turnover being declared by the business. Secondly, it was self-evident to Mr. Falco, at the time at which the investigation that led to the present case was made, that he had already had a problem based substantially on actual Z readings exceeding declared turnover. We will fully explain below what Z readings are, and the nature of those readings taken from the particular computerised tills in this case. For present purposes, the point that we make is that the earlier dispute focused on precisely the point in dispute in this case, and it would have been surprising if Mr. Falco had been oblivious to the seriousness of this disparity.

The HMRC visit that led to the current dispute

When the HMRC officer, Mr. Cousin, made his visit to Mr. Falco's wine bar, he had gathered that the earlier inspection made by another officer had focused on a significant disparity between Z readings and declared turnover, and he rather expected that operating procedures would have been improved so that there would be no continuing problems of this nature.

Mr. Cousin asked to see the records of turnover and the Z readings from the tills, and was given a box in which there were various papers, mostly or all consisting of Z readings.

The operation of the tills, and the various forms of "Z readings"

We must now explain the operation of the three tills that were in use for the period, namely VAT period 10/03 being the three months ending on 31 October 2003, that Mr. Cousin chose in order to make his comparison between the Z readings from the tills and the declared turnover. We should add that this period was taken because it was the one for which there was the best evidence. In other words more Z readings were lost or missing for other periods so that calculations would have been based more on assumptions than on actual figures. It is also right to mention that the period 10/03 was not a period for which additional assessments are now actually in dispute. It was simply the period with the most complete set of Z readings, from which to make the comparison.

During the sample period, 10/03, the Appellant was using three tills. Two tills were newly acquired computerised tills. The third was an older till, presumably of the type that had been in operation in the period the subject of the earlier VAT dispute.

So far as is material to this case, Z readings are the print-outs of till receipts that can be obtained by pressing a button on the till machine. These buttons are often pressed daily after the close of business. The resultant Z readings can then be used for various purposes. They can be used to check whether the cash and credit card slips in the tills correspond with the cumulative figures for the day in the Z reading. They enable management to compare the takings on different days, or during other different periods if the readings are taken for other periods. If all the Z readings for a 3 month VAT period have been retained, the totals on each of the readings can be aggregated to supply the gross turnover recorded for VAT purposes, provided at least that all the turnover is rung up on the tills.

The information often printed on Z readings includes:-

the time and date on which the reading was taken;

an identification number, the number of each successive reading increasing by one; and

the total of takings rung up through the till since the last Z reading.

Many tills enable traders to take readings at different intervals. Thus many enable takings to be taken on a Z1 reading, which might be taken daily, with others being taken on Z2 readings, perhaps weekly or monthly. The significant feature of many Z readings is that they only show the current reading measured from the last time a reading was taken. Accordingly if the trader only keeps Z readings numbered say 01, 02, 03, 07,08,09 and 10, someone studying those readings will only be able to calculate the turnover rung up on the 6 days indicated if the readings were taken daily, and would not be able to calculate the turnover that would have been recorded on the missing Z readings, i.e. readings 04 to 06. If thus the readings were being used by a VAT officer to calculated gross turnover rung up on the particular till, the officer would have to estimate the turnover recorded on the lost Z readings. This estimate might be done on an averaging basis or by reference to the average for the days of the week for which readings were missing. The result is that sensible assumptions would have to be made and there might be some inaccuracy as a result. It is worth mentioning that an engineer would generally be able to access a further memory on the hard disc of the tills that generate readings of the type referred to above, and that that engineer might be able to re-create the accurate figures for the missing days because the hard disc memory would replicate the information on all Z readings, whether retained or lost.

The general practice of the Appellant was for Z readings to be taken daily., whilst "cashing up" and after close of business.

The two modern computerised tills, tills A and B

Two of the modern computerised tills operated by the Appellant in the test period taken by Mr. Cousin operated somewhat differently from the examples given in paragraph 14 above. In addition to the 3 items of information given on each Z reading, the Z reading "helpfully" also produced a cumulative reading running from the last date on which an engineer re-set the till. One assumption thus that the till had not been re-set during a VAT period, the total turnover for a 3 month VAT period could be ascertained on the two computerised tills by simply finding the Z readings dated 1 August and 31 October, and looking at the difference between the cumulative readings on the two dates. Nothing would thus turn on whether many of the intermediate records had been lost because they would be bound to have recorded the turnover rung up on the "missing days" that would anyway be included in the cumulative reading on the readings that had not been lost. Mr. Cousin explained to us that he had had to make one trivial adjustment to the difference figure between the 1 August and 31 October cumulative figures, just to ensure that the 1 August reading itself was not double counting income from the last day or days of July. Since however the current, rather than cumulative figure shown on the Z reading for 1 August in respect of the two computerised tills, "tills A and B", was only £500 and £1073 for the day, 1 August, even if the basis of the calculation designed to see that the 1 August reading did not double count turnover from July was wrong, this judgment and calculation would have little effect on the accuracy of the main calculation. This main calculation was to the effect that the VAT inclusive turnover that had been recorded on the cumulative basis through tills A and B was £63,431.40. Repeating the point just made, even if the one minor estimate that had to be made to produce this figure was wrong, the error cannot possibly have amounted to more than about £1,500 (and in reality much less) so that the "solid" figures, unaffected by any estimation or judgment, would still have been in the region of £62,000.

The Appellant's declared turnover for VAT purposes for the period 10/03, from 1 August 2003 to 31 October 2003, adjusted to a VAT inclusive figure for the sake of the comparison with the figures derived from the Z readings on tills A and B in the previous paragraph, was £56,766. Thus the turnover recorded on just two of the tills, where virtually no estimation was required by Mr. Cousin, was already between £6,000 and £7,000 more than the turnover declared on the Appellant's VAT return for that period.

The third and older till, till C

The Appellant had a third till, till C, which was of an older variety, and till C only produced one set of Z readings. Those Z readings contained the information summarised at the beginning of paragraph 14 above, and did not produce any sort of cumulative readings. It is still possible to ascertain when Z readings were taken for which the Z reading print-outs were missing because this would be obvious from the consecutive "Z reading identification numbers" that could not be found. Thus in the example given towards the middle of paragraph 14 above, it would be evident that readings 04, 05 and 06 would all be missing. Without accessing the hard disc (and this has not been done) it would be impossible to calculate the turnover rung up on till C on those 3 missing readings.

In this case 9 of the Z readings from till C for the specimen period 10/03 were missing, and 24 were found by Mr. Cousin. The total of the turnover recorded on the actual till C Z readings that Mr. Cousin found was approximately £9,000. Mr. Cousin then explained to us how he had estimated the turnover that might have been recorded on the missing Z readings. This was done by judging the days of the week for which the readings were missing (generally by looking at the days dealt with by Z readings for the periods before and after each missing reading), and by then calculating the average turnover on similar days of the week on other actual Z readings, but ignoring (in looking at the averaging) any actual turnover figures that appeared to be exceptionally high. Applying these principles Mr. Cousin added to the actual turnover figure on the Z readings that he found for till C (i.e. the figure of £9,000 mentioned above) about £3000.

Resultant calculations

Two very simple calculations can now be made. If one simply adds up the actual figures recorded on all three tills, and disregards every single £ of turnover that depends in any way on any estimate made by Mr. Cousin, for the period 10/03 the total figure is about £71,000 (£62,000 plus £9,000) which is approximately £14,000 more that the figure of turnover declared by the Appellant for VAT purposes. If one also adds in the figures, based in any way on estimates and assumptions made by Mr. Cousin, the disparity increases from approximately £14,000 to £18,500.

To complete the summary of the calculations that Mr. Cousin made, Mr. Cousin then calculated the percentage disparity between the declared figure and the figure that he had calculated, the latter being 32% greater than the former. This percentage adjustment was then made to each of the declared turnover figures for the periods in dispute. The effect of this method was as follows. In the event that turnover was declining in later periods, the adjustments would correspondingly be reduced because they would always represent the same percentage of reduced turnover. If on the other hand there was any evidence to suggest that the inaccuracies would be reduced in later periods, then it would not be fair or appropriate to use the constant figure of 32% and pay no regard to new procedures that might have reduced or even eliminated the disparity between Z readings and the figures declared as gross turnover for VAT purposes.

Mr. Cousin confirmed that he would have preferred to have verified his calculations by running some actual and estimated figures for a later period amongst those for which the additional assessments have been made. He said however that the available records for all periods other than the period 10/03 were so much worse that he found it impossible to run this "sanity check".

Other evidence in relation to the management of the bar, the operation of the tills and the procedures for recording takeover

We must now summarise the evidence given by Jane Falco and to a lesser extent her father in relation to the daily procedures in operating the bar and operating the tills.

Jane Falco was the manageress of the bar. Whilst she herself had had little or no training on operating the relatively new computerised tills, she gave what instruction she could to the bar staff, and she kept an eye on bar staff at all times to see that there was no pilfering.

The new computerised tills were operated not by keying in the correct price of the drinks and other items purchased but by selecting the right screen on a touch pad, say a screen displaying Red Wine or White Wine or soft drinks, and by then touching the squares on the screen representing the drinks that had been ordered. The screen would then display the prices for the drinks ordered which the customer would be charged, whereupon the cash would be placed in the till. We were told that at times customers had been able to pay by credit card as well as by cash, but this had been changed and Jane Falco thought that by the period taken for calculation purposes (1 August 2003 to 31 October 2003) customers could pay only in cash.

The ordinary procedure for calculating takings was for Jane Falco herself to clear the till after the close of business, then to deduct the initial float (if it had not already been removed once there were adequate takings and change in the till from the current takings), and then to add up the gross takings in the till. She would then take cash in order to pay the bar staff, the doorman, and the DJs, and the remaining cash would represent the gross profit that she would give to her father when he arrived (presumably on the following morning). She would then do a rough calculation on her notebook of all the figures mentioned from the gross takings, down to the net cash or gross profit figure and would then prepare a neat piece of paper, showing the same figures, for her father.

Jane Falco also took Z readings on the three tills at the close of business on each day. There was considerable reference to the fact that the two computerised tills gave great trouble either because they were defective or because they were too complicated to operate, particularly by bar staff who had been given little or no training in operating the new tills. Reference was also made to the fact that the two new tills periodically "froze" which appeared to mean that they would not even open. When this occurred, bar staff would resort to various ways of trying to un-freeze the tills, extending to pressing buttons (or presumably keys on the touch screen) to re-activate the machine. When these efforts failed, takings would generally be placed into the third old-style and less troublesome till, or else would be recorded on a paper tab behind the bar. When taking Z readings, Jane Falco said that she would take Z readings from all three machines if all had been in operation but would not take a reading from the old style machine if the computerised tills had operated smoothly such that none had needed to use the old till, till C.

Jane Falco did report that when she took Z readings from the two computerised tills they would often show higher figures than the gross cash counted in the same tills. She said that she would report this to her father, but we also got the impression that she was not fully aware of the significance of the Z readings (particularly from a VAT point of view and particularly in light of the fact that the earlier inquiry had focused precisely on this point, namely that the disparity between the cash figures and the reported turnover on the one hand and the higher Z readings on the other suggested that the business was under-recording takings). We got the impression moreover that when Jane Falco complained to her father about the tills that the complaints centred more on the fact that they would freeze, and on the fact that they were difficult and complicated to operate, rather than on the mis-match between cash readings and Z readings.

From Mr. Falco's evidence, we understood that he would take the pieces of paper handed to him by his daughter and pass those to his accountant, Mr. Holman, whereupon Mr. Holman would produce the figures for the VAT returns from the same papers. We gathered from the notes and evidence taken and given by Mr. Cousin that when Mr. Cousin had discussed the calculation of turnover at his initial interview with Mr. Falco that Mr. Cousin had asked whether there were ever disparities between the cash figures and the Z readings. The answer recorded in the Notes made by Mr. Cousin was that "This did happen" and that when it did "we followed the Z readings". It was not absolutely clear whether Mr. Falco confirmed that he recollected giving this answer but if he did he was obviously mistaken. This is of course because the figures given to him by his daughter were fundamentally based on the cash takings and not the Z rolls, and the feature that the declared turnover for VAT purposes was significantly below the total figures shown on the Z readings that were found (let alone including those lost in addition).

Mr. Falco also said in his evidence that he repeatedly complained about the failings of the computerised tills to the supplier, and they were eventually returned to the supplier and replaced by simpler Casio tills, that were more like the earlier tills that had been in use before the acquisition of the computerised tills, and also more like till C. We were not clear however what it was that was said was wrong with the computerised tills, and it was pertinent to note first that no refund was given by the supplier, and that the short letter sent by the supplier on one occasion in relation to telephone complaints about the tills concentrated only on some feature relating to whether the printers worked or not, and the feature that some additional software could be delivered for either £200 or £500, and that this might help. There was certainly no reference to the specific problem that the tills were regularly over-recording, and we were told that no letter or e-mail or other written communication had been sent to the supplier from which we might deduce which particular faults were being addressed.

Aside from the question of what complaints were made to the supplier of the tills, we should simply record that the computerised tills were at some date returned, and quite possibly by the beginning of the first actual VAT period for which additional assessments were made, the Appellant had acquired two replacement Casio tills, reasonably similar to till C, and it was said that staff found these till easier to operate.

We put a number of questions to Jane Falco in an effort to try to ascertain whether we could understand whether and in what respect the computerised tills were under-recording, and secondly whether Z readings were taken on till C on days when that till had not been used, such that it might be the case that the missing Z readings were taken on days when there would be zero readings, with the readings being thrown away on that account.

The first question that we asked was whether there ever arose a practice, on account of lack of confidence in the computerised tills, that the bar staff would calculate the price of drinks in their head (for example adding up a total price of £32) in the expectation that the till would probably mis-calculate the price, and that when the various squares on the key pad were pressed the till would wrongly indicate that the price was higher, say £45. The reason for asking this question was of course that if the bar staff ordinarily charged the amounts shown on the tills, then even if the tills were over-recording, it would surely follow that customers would be over-charged and the cash would be in the tills or else customers would complain, the error would be corrected and the mal-function of the machine would have become very evident to all. We were told in response to this question that the bar staff always charged the prices that the tills indicated; and that on the rare occasion when say some drink had been mistakenly entered twice, Jane Falco would be called over to the till and the usual remedy would be to deduct one drink of the same time on the next occasion such a drink was ordered. There was however no remote practice of the bar staff charging prices calculated in their heads on account of loss of faith in the calculations from the tills, and it was the latter that were invariably used when giving customers their bills.

In response to our question as to whether Jane Falco would take a Z reading from till C regardless of whether it had been used or not, she said that she would only have taken Z readings when this till had been used. This question only related of course to a possible over-calculation by Mr. Cousin of no more than about £3,000 for the sample period, but the answer given suggested that the method of calculating the turnover shown on the 9 missing Z readings for till C in the sample period remained fair and appropriate, and was not undermined by this feature.

Two points emerged in relation to the feature that the computerised tills periodically froze. We were first told, as mentioned above, that bar staff would resort to many expedients to try to activate the tills, including pressing buttons and squares on the key pad in a random way. We were secondly told that in case where the bar was very busy, and perhaps it was not possible to ring up takings on till C, tabs would be kept behind the bar indicating on pieces of paper the takings received, and the bundle of cash, that could not yet be put into the tills.

In relation to the first of the points mentioned in the previous paragraph we were given no actual evidence at all as to whether when a till was frozen it might be the case, or was better still even observed to be the case that, the machine would record takings simply because random keys and squares might have been pressed. It did seem that none of the Z readings on the two computerised tills was inexplicable. None in other words were so high as to suggest that someone had pressed the square for Krug champagne ten times in a rather risky attempt to open the till. The till readings in other words were always a credible record of what the turnover might have been.

In relation to the second point raised in paragraph 35, we were told that when the computerised tills were operating again, the money collected against the bar tabs would be put into the till without being rung up. In other words this operation would suggest that Z readings would in fact be lower that the addition of all the cash in the tills.

We should finally record the fact that there seemed to be a surprising lack of communication between Mr. Faldo and his daughter in relation to the significance of Z readings, and a surprising lack of attention to the significance for VAT purposes of these readings. Whatever the outcome of the earlier VAT dispute which currently remains listed for hearing before this Tribunal, Mr. Faldo must have realised by the period taken as the test period to compare Z readings and gross takings reported for VAT purposes for this appeal, that there had already been a VAT dispute involving precisely the point presently in issue. We thus find it surprising that he and his daughter were not very alive to the serious implications of the Z readings exceeding the declared takings by £18,500 in a three month period, and one would have thought that anyone in this position would have taken urgent steps to ascertain the explanation for the disparity. From the perspective of the father and daughter, each of whom trusted the other, one would have thought that they would have considered carefully the three possibilities of staff pilfering, customers handing inadequate money to the bar girls which they had insufficient time to check at busy periods, and till error. And one would have thought that whichever was identified as the explanation of the disparity would be identified and remedied. Moreover very careful records should have been kept to explain the disparity.

Notwithstanding the observations on the reaction and action that we would have expected, the impression that we gained was that although Jane Faldo took all the Z readings, she did not quite appreciate their significance or the significance of the mis-match between the cash and Z reading figures. Indeed when she handed the cash and her hand written cash reconciliation figures to her father, her remarks about the tills seemed to have concentrated more on the difficulty to operate them and the inconvenience to staff and customers when they froze, rather than on the crucial disparities between the two figures. For his part, Mr. Faldo appeared to be oblivious to the serious disparity between the two figures. If he did say that when there was a mis-match between the figures, the Z reading figures were used to demonstrate the turnover for VAT purposes, he was obviously wrong because the declared figures were much lower than the Z readings. However there was no suggestion that when Mr. Cousin asked to see the Z readings, Mr. Faldo was evasive or was reluctant to hand them over. We somewhat infer that he was oblivious to the significance that might result from an inspection of the readings, and their being compared with the declared takings.

The relevant law

There is no dispute about the law in this case. Indeed the only significance of the law is in identifying how Mr. Cousin performed his function of examining records and calculating and estimating turnover, and how we should approach our responsibility of deciding whether Mr. Cousin acted properly, and of deciding whether there is any other ground on which we might adjust the assessments. We will not state the relevant tests, but will seek to reach our decision in accordance with our understanding of them.

The contentions on behalf of the Appellant

It was contended on behalf of the Appellant that:

• the assessments were unsound because they were based on assumptions and estimates and that the calculations made by Mr. Cousin were unfair;

• the assessments were wrongly influenced by preconceptions adopted by Mr. Cousin on account of a discussion that he had had with the HMRC officer who had undertaken the earlier inquiry in relation to declared takings and Z readings.

• it was wrong to commence the calculations by taking the Z readings because the computerised tills were regularly giving wrong readings;

• once the tills had been replaced by simpler Casio tills, roughly like till C, the problems with the tills ceased and were thus no longer relevant during the various VAT periods for which the additional assessments were made, so that it was wrong to take as the test period a period in which the wrong figures resulted from a feature that was absent in the actual periods the subject of further assessments;

• the Z reading figures simply could not be right because if one applied the standard mark-up to the quantities and cost of drink purchased, there would again be a great disparity between the gross sales calculated in that manner and the sales derived from the Z readings; and

• as the honesty of Mr. Faldo and his daughter had not been challenged by the Respondents or overtly questioned by us during the course of the hearing, we had to accept the evidence of Jill Faldo that the figures that she produced and that were eventually compiled together and forwarded to HMRC for VAT purposes were correct and that the tills thus had to be assumed to be over-recording.

The contentions on behalf of the Respondents

We consider it unnecessary to summarise the contentions on behalf of the Respondents since the format of our decision will follow closely those contentions.

Our decision

We accept Mr. Cousin's evidence that he approached his visit to the Appellant's bar with an open mind and in the expectation that the Appellant's procedures for calculating turnover would have been improved in the light of the earlier trouble that had resulted from the recent and earlier HMRC contention that turnover taken from till Z readings significantly exceeded reported turnover.

We also accept Mr. Cousin's evidence to the effect that when he commenced his task of checking gross turnover, he turned to the obvious best evidence of turnover, namely to the Z readings from the tills, and was given a slightly chaotic box of jumbled and incomplete Z readings. We accept that this was the right starting point for his enquiry.

Many VAT cases involving the calculation of turnover where there are incomplete Z readings occasion problems largely because the tills often fail to produce cumulative readings in the way that the two computerised tills did in this case. HMRC officers are thus often compelled to make numerous estimates of turnover where there are missing returns. As explained above in this case, whilst we must yet deal with the issue of whether the computerised tills were defective so that they were regularly producing wrong and excessive turnover figures, that apart the cumulative turnover figures available on tills A and B enabled Mr. Cousin to ascertain during his 2 hour visit that:

• by taking the Z readings for 1 August 2003 and 31 October 2003 from tills A and B and by making the very minor adjustment mentioned above, he could easily derive total turnover figures for the sales rung up on tills A and B, without resorting to any estimation or assumptions, and

• the resultant figures even for just two of the three tills already produced a turnover figure in excess of the declared turnover.

Prior to addressing the question of whether we accept the Appellant's argument that the defects encountered with the two computerised tills rendered all readings from those tills suspect, we now deal with the further calculations that Mr. Cousin made. As already mentioned these related solely to about £3,000 of turnover which was calculated on an averaging basis for the days for which readings were missing, adjusting the averaging to eliminate any days showing exceptional turnover. We consider that Mr. Cousin approached this calculation in a fair manner, and indeed in a way that was favourable to the Appellant, and that his calculation cannot (subject to one point that has occurred to us after the hearing, and which we mention in the next paragraph) be challenged. We have already referred to the fact that we specifically asked Jane Faldo whether by any chance she took Z readings from till C on every night, regardless of whether the till had been used or not with the possible consequence that the 9 missing Z readings from till C might have all recorded zero readings and been thrown away for that reason, and she confirmed that readings were only taken when the till had been used. With that answer in mind, and subject to the minor point that we record in the next paragraph, we cannot accept any criticism of the calculations performed by Mr. Cousin in inserting the few estimated figures of turnover along-side the vast majority of "solid" actual readings.

Since the hearing one minor point has occurred to us in relation to which it would certainly not be appropriate to re-call the parties to produce any further evidence but which we are still inclined to mention. We accept that if a Z reading on till C was, say, missing for a Friday that it was obviously appropriate to calculate the average turnover for other Fridays, ignoring the unusually high figures. We feel however that we should address one detail in relation to this. We accept that it is reasonable to assume that turnover on each day of the week might run at a fairly constant level, football matches apart. There is no reason to suppose however that there would be any necessary pattern for the way in which the various tills were used. In other words it would seem wrong to calculate the figures for a missing Friday by simply taking an adjusted average for the till C figures for all recorded Fridays. If, in the alternative, Mr. Cousin was able to calculate the adjusted average Friday takings from all three tills, and then ascertain what actual turnover had been recorded on tills A and B for the missing Friday, only the balance of the adjusted average would be allocated to till C in the estimating process. Without in any way making this part of our decision, we simply express the hope that if Mr. Cousin performed his adjusted averaging calculation by reference to the other Friday figures on till C alone, it would seem to us to be fair to reduce the calculated figure marginally if the averaging calculation was first made in relation to the figures from all three tills and if this approach produced a lower total figure for the 9 missing till C Z returns. This may have been the approach anyway, but we would still suggest that HMRC might reduce the assessments very marginally should this be an approach to calculation that Mr. Cousin did not follow, and should it produce a lower as distinct from higher figure for the missing Z returns.

That very minor point apart, and it may be that Mr. Cousin's approach was in fact the one that we have advocated, we cannot agree with any criticism of his calculation of the turnover for the period 10/03, once at least one accepts that the Z readings from tills A and B cannot be dismissed on account of some electronic or operator errors. That thus leaves us with the two key questions of whether there is any significant evidence that leads us to say that the Z readings must simply be ignored and rejected; and secondly whether it was inappropriate to apply the under-declaration percentage derived from the period 10/03 figures to all the periods actually in dispute.

In approaching the first of the two difficult questions that we have posed in paragraph 48, we first accept that the burden is on the Appellant to produce reasonable evidence to show that the Z readings, which we do regard as the best and most appropriate starting point in these calculations were unreliable.

A very marked example of the way in which the Appellant has failed to displace the validity of the Z readings is by the contention advanced to the effect that taking into account the purchases of wine etc, and the Appellant's profit margin, it would have been impossible to generate the turnover exhibited by the Z readings. Since we were not given the slightest indication of the level of purchases, or of the mark-up, and since we would anyway have found this approach to calculating gross takings extraordinarily difficult even with full information, we cannot adopt this contention. Not only can we not adopt it as the principal method of calculating gross turnover, but it is quite impossible to apply it even as a secondary "sanity check" of the figures derived from any other approach. This contention was an example of the Appellant suggesting faintly possible arguments without the slightest supporting evidence, and we accept the contention on behalf of the Respondents that this fails by a very wide margin to satisfy the burden of proof incumbent on the Appellant.

We now approach the more difficult question of whether anything, in particular the evidence given by Jill Faldo, gave us sufficient ground to doubt the accuracy of the actual Z readings, on account of electronic or operator error, such that we should decide that any calculations based on the actual Z readings are unreliable.

Whilst we do not doubt the honesty of the two witnesses, we still conclude with little doubt that the grounds for suggesting that the computerised tills produced over-readings were very flimsy. We note the following points in support of this observation, namely that:-

Absolutely no records were available to us to support the figures actually returned as gross turnover, derived from Jill Faldo's late night calculations on scraps of paper.

There seemed to be an almost incomprehensible lack of understanding between Jill Faldo and her father as to the significance of the Z readings, and the feature that they periodically differed from her cash reconciliations. Whilst she took Z readings, the figures that she apparently produced for her father reflected the gross cash taken from tills, minus the float and minus the cash handed out in the kitchen to bar staff, DJs and others. She appeared to refer to the tills not so much because of the different Z readings that they were producing but because they froze and caused problems for staff and customers. By contrast her father, who should have been very alive to the significance of the alleged disparity between the figures appeared oblivious to the fact that the figures that he was passing on to his accountant for VAT purposes were different from, and much lower than, the Z readings. And this was so notwithstanding that a very recent VAT investigation had focused on just this problem.

It is next noteworthy that precisely the same disparities between Z readings and declared turnover occurred in the earlier period when the maligned computerised tills had not been acquired and when simpler Casio tills were being used. We accept that the appeal has not yet been heard to determine that earlier dispute and we are not making any assumptions as to why there were similar disparities. We simply make the point that if everything is now blamed on the computerised tills, how is it that the same problem arose in the earlier period?

We specifically asked Jill Faldo whether bar staff were calculating the amount to charge customers in their heads, acknowledging the fact that the tills would very likely indicate a wrong and excessive charge. We were told that this was not happening and that when the key pad squares were pressed to enter the relevant drinks ordered, the bar staff would charge the customer the price that the till indicated.

We were unimpressed with the remarks about the dissatisfaction with the two computerised tills, apparently voiced to the supplier, and were not convinced that this dissatisfaction really focused on the present issue of the disparity between Z readings and cash calculations. The supplier of the tills plainly offered no refund when they were returned and none seems to have been fought for. The letter from the supplier did not remotely suggest that the problem complained about related to the Z readings. Indeed it would perhaps be odd if it had done because we certainly gained the impression that until the much later interview between Mr. Faldo and Mr. Cousin, Mr. Faldo was barely aware of this particular alleged problem with the tills. Had he been aware of it, why would he not have handed over the Z readings to Mr. Cousin and immediately claimed that they were "useless" because of well recorded problems of excess Z readings, ideally supported by extensive documentation and proof of how better to calculated the correct gross turnover?

Finally we were not shown one single piece of paper that actually evidenced the claimed disparities between Z readings and cash calculations. All the "back of the envelope" calculations had been lost, and no other evidence was produced to support the proposition that the tills were producing random and bizarre figures.

We turn now to the other difficult question of whether it was appropriate for Mr. Cousin to calculated the additional assessments for the periods actually in dispute by reference to figures for an earlier period, indeed a period when the predecessor trader to the actual Appellant was conducting the business, and a period when the maligned computerised tills were in operation. They were disposed of at some time and we do not know when but we are prepared to assume that they were not in use in any of the periods for which the additional assessments were made.

We agree that it was unfortunate that the test period had to be the period 10/03, with the deficiencies just addressed. We have already recorded why Mr. Cousin had to select this period, and the cause of this, namely markedly inferior records for other later periods, was hardly Mr. Cousin's fault. In the light thus of the fact that very similar problems appeared to have arisen before the computerised tills were even purchased, and in the light of the fact that we were given absolutely no evidence whatever that matters were rectified in later periods, we conclude that Mr. Cousin acted entirely reasonably, and we have been given no evidence on which to suggest any adjustments or reductions that might be made to the additional assessments.

We repeat the point that we made earlier in this decision namely that we both felt some unease on account of the fact that we detected no reason to doubt the honesty of either Mr. Faldo or his daughter, and frankly felt unable to make any suggestion as to why there were the crucial disparities between the two sets of figures that there were. Having regard to the tests that we must apply however we have no doubt that Mr. Cousin approached this case and performed his functions in an impeccable manner, and that absolutely no well supported, preferably written and contemporary evidence was produced to us by the person shouldering the burden of proof as to how we might challenge Mr. Cousin's calculations or adjust and reduce the assessments.

HOWARD M NOWLAN

CHAIRMAN

RELEASED: 22 February 2008

LON 2007/0825