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United Kingdom VAT & Duties Tribunals Decisions

You are here: BAILII >> Databases >> United Kingdom VAT & Duties Tribunals Decisions >> Clarke & Anor (t/a The Mongolian Bar) v Revenue & Customs [2008] UKVAT V20784 (22 August 2008)
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Cite as: [2008] UKVAT V20784
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Ian Robert Clarke & Viven Doris Clarke (t/a The Mongolian Bar v Revenue & Customs [2008] UKVAT V20784 (22 August 2008)
    20784
    VAT – ASSESSMENT – Appellants ran a restaurant business – assessed for VAT on undeclared sales, miscellaneous income and admission charges – persuaded by Appellants' evidence of no under declarations – assessment reduced to £1,309.53 – Appeal allowed in part

    MANCHESTER TRIBUNAL CENTRE

    IAN ROBERT CLARKE & VIVIEN DORIS CLARKE Appellant
    t/a THE MONGOLIAN BAR
    - and -

    HER MAJESTY'S REVENUE and CUSTOMS Respondents

    Tribunal: MICHAEL TILDESLEY OBE (Chairman)

    MARJORIE KOSTICK BA FCA CTA (Member)

    Sitting in public in Birmingham on 11 June 2008 and 8 August 2008

    The Appellants appeared in person

    Bernard Hayley of the Solicitor's office of HM Revenue & Customs, for the Respondents

    © CROWN COPYRIGHT 2008

     
    DECISION
    The Appeal
  1. The Appellants were appealing against an assessment for unpaid VAT dated 20 October 2004 as amended in the sum of £42,608 plus interest for the quarterly periods from 12/01 to 06/04.

  2. The assessment comprised three elements:

    3. (1) £17,870 VAT on undeclared sales determined by a weighted mark up exercise.
    (2) £6,618 VAT on undeclared miscellaneous income from phones, gaming and cigarettes machines.
    (3) £18,120 VAT on undeclared admissions charges for late night events.
    The Dispute
  3. The Appellants purchased the Mongolian Bar as a going concern in September 1998. The Mongolian Bar was a licensed restaurant operating as an indoor barbeque and party venue offering an all you can eat stir fry buffet at a fixed price. The bar had 150 covers, and was open six days a week generally from 9am to past midnight. The business was initially profitable but encountered stiff competition from 2000 with the opening of new party venues. The Appellants diversified their operations by introducing take-away sales from 2001 and late-night opportunities from 2003. The Appellants, however, were unable to rescue the business with the result that it was sold in April 2006.

  4. On 29 April 2004 the Respondents made a routine visit of the business. The business was selected for a visit because the Respondents' records revealed a drop in turnover, a low mark up, and high rates of zero-rated sales. The Respondents found the Appellants' accounts in a poor state, in particular, missing purchase invoices, no records of miscellaneous income, and no bank statements. The Respondents considered that there had been an under-declaration of sales and decided to test this by carrying out a weighted mark up exercise of wet sales for the period 09/02, the only quarter for which there was a complete set of purchase invoices. The outcome of the exercise was that it revealed an under-declaration of output tax by 12.71 per cent.

  5. Further the Appellants did not produce documents evidencing miscellaneous income from phones, gaming and cigarettes machines. The Respondents decided that the Appellants had not declared the VAT on this income with the result that an additional assessment for VAT was raised, based on the miscellaneous income for quarter 09/01. Finally the Appellants did not provide the Respondents with independent corroboration of their assertion that they did not receive the admission charges for late night events on Fridays and Saturdays which started with the grant of a late night licence from January 2003. In those circumstances the Respondents assessed the Appellants for VAT on admission charges for six periods from 03/03 to 06/04. The assessment for £18,120 VAT was derived from the assumption that 130 people attended each event paying £6 admission.

  6. The Appellants accepted that their business records were in a poor state. The Appellants, however, considered that their professional advisers had let them down and that their dispute with the Respondents would have been resolved if their advisers had done their job properly. The Appellants denied that they suppressed sales. They relied on printouts from the EPOS system to demonstrate the accuracy of their VAT returns during the disputed periods. The Appellants contended that they did not receive admission charges for events held on Fridays and Saturdays except for a short period between 28 June 2003 and 18 July 2003. They decided to let their premises to outside promoters who received the admission charges with the Appellants taking the profits on the bar sales.

  7. The dispute between the parties concerned the correctness of the assessment. The onus was on the Appellants to demonstrate on the balance of the probabilities that the assessment was wrong.

    8. The Evidence
  8. We heard evidence on oath from Mr Clarke for the Appellants and Mr Bourne, the assessing officer for the Respondents. A bundle of documents was received in evidence.

  9. The Appeal was started on 11 June 2008 but was adjourned part heard because Mr Bourne's witness statement had not been served upon the Appellants beforehand.

    10. Reasons for Decision
  10. Section 73 of VAT Act 1994 empowers the Respondents to raise assessments for unpaid VAT where it appears to them that the taxpayer's returns are incomplete or incorrect or to recover VAT which has been wrongly repaid or credited as input tax to the taxpayer.

  11. Under section 73 the Respondents are required to consider fairly all material placed before them by the Appellants, and on that material, come to a decision which is reasonable and not arbitrary as to the amount of tax due. The Respondents are under no obligation to do the work of the Appellants by carrying out an exhaustive investigation of the Appellants' VAT returns and accounting journals.

  12. In this Appeal we consider that Mr Bourne had reasonable grounds for suspecting that the Appellants' VAT returns were inaccurate. Mr Bourne formed his view from an analysis of the Appellants' VAT returns which showed a declining turnover, a low mark up with some quarterly periods having a negative mark up and a relatively high proportion of zero-rated sales. Mr Bourne believed that his initial suspicions were confirmed by the poor state of the Appellants' business records and the Appellants' failure to meet his requests for documents. Mr Bourne decided to verify his suspicions by conducting a weighted mark up on wet sales which showed an under-declaration of output tax by 12.71 per cent. The onus was upon the Appellants to give a satisfactory explanation for the matters identified by Mr Bourne.

  13. Mr Clarke explained that their restaurant was affected by increased competition in the party venue market which was the main cause of the downturn in their business from 2001. The number of covers filled on a typical Saturday declined from 150 to below 100 as a result of the competition. The Appellants' attempts to diversify their business were unable to reverse the downturn. The takeaway business folded in April 2003. The increased revenues from the late night licence on a Friday and Saturday only materialised when an event was organised by outside promoters. Mr Clarke stated that the negative mark up recorded in some quarters was due to accounting for purchases in the wrong quarter. Although Mr Clarke gave a cogent account for the fall in turnover, his explanation for the low mark up was less convincing.

  14. The Appellants' zero-rated sales were connected with its take-away business, which sold sandwiches and salads. Mr Clarke, however, was unable to explain the scale of zero-rated sales in some quarters which bore no relationship with the proportion of zero-rated sales as stated on the EPOS printouts and continued after the takeaway business folded.

  15. The Appellants robustly disputed the three components of the assessment. The first component concerned the allegation that the Appellants had under-declared their sales. The Respondents conducted a mark up exercise which purported to demonstrate that the output tax due on the under-declared sales constituted 12.71 per cent of the output tax declared. The Appellants challenged the validity of the mark up exercise, relying instead on the printouts of sales figures produced by EPOS which they said represented an accurate account of their business and provided the data for the VAT returns. EPOS was a sophisticated electronic point of sale system, enabling the Appellants to exert effective control of their business. The system was tamper proof and its programmed procedures reduced significantly the risks of pilfering by members of staff. EPOS generated a wide range of reports on all aspects of the Appellants' business. The Appellants produced a session memo pad report for each of the quarters in dispute except 06/04. The reports were printed on 24 April 2004, the time of Mr Bourne's second visit to the premises. According to the Appellants, they formed a reliable record of the sales from the business broken down between food and drink sales and gave totals for all sales during the quarter.

  16. The table below compared the value of sales recorded on the EPOS session memo pads with the value of outputs plus output tax (the value of gross sales) declared on the VAT return.

    17. Quarter Gross Sales (EPOS) VAT inclusive (£) Net Outputs plus VAT declared on VAT returns (£) Difference between EPOS Gross Sales and declarations on VAT returns (£)
    12/01 101,892 115,734 - 13,842
    03/02 76,364 74,527 1,838
    06/02 81,719 84,458 -2,739
    09/02 71,006 73,497 -2,490
    12/02 90,486 90,486 Nil
    03/03 65, 875 65,874 1
    06/03 68,251 78,367 -10,112
    09/03 89,512 92,995 -3,482
    12/03 128,654 146,596 -17,942
    03/04 91,190 93,869 -2,768
  17. The analysis from the above table revealed that the EPOS value of sales was less than the declared sales on seven quarters, the same in two quarters, and greater in one quarter. The EPOS system did not record the value of receipts from the phone, gaming machines, and cigarettes sales, the details of which were kept on a miscellaneous receipt sheet. The exclusion of the miscellaneous receipts from the EPOS system would account for the values on the session memo pads being less than the declared sales on the VAT returns.

  18. Mr Bourne confirmed that he matched most of the quarterly output tax figures on the Appellants' EPOS VAT breakdown sheets to the output tax declared on the corresponding VAT returns.

  19. The weighted mark up exercise carried out by Mr Bourne was restricted to wet sales which formed about 60 per cent of the Appellants' turnover and covered a relatively short period of one quarter ending September 2002. Mr Bourne used the prices in the March 2004 list, as amended to reflect September 2002 prices for the mark up exercise. It transpired from the evidence that the Appellants operated a three tier price list: day until 6pm, evening 6pm to 12 midnight, and late after 12 midnight. The list used by Mr Bourne reflected the evening price list. We are satisfied on the evidence that the majority of the Appellants' sales during the September 2002 quarter would have occurred at day-time prices which were 25 per cent cheaper than the evening price list. The September 2002 quarter covered the summer months when the demand for evening indoor barbeques was significantly reduced.

  20. We concluded that the evidence of sales as recorded in the EPOS reports carried more weight than the results of the mark up exercise. The information on the print-outs was derived from a secure system which had inbuilt controls reducing the risks of tampering and pilfering. The printouts were dated prior to the ending of the Respondents' enquiries into the Appellants' VAT returns. The values recorded on the EPOS printouts corresponded with the value of the output tax declared on the Appellants' VAT returns except for one quarter. In contrast the methodology for the weighted mark up exercise was problematical relying upon information taken from one quarter under investigation which was not representative of the other periods in dispute. Further the exercise disregarded the fact that the majority of the sales was at discounted prices, which would have exaggerated the mark up. We find that there was no persuasive evidence that the Appellants had under-declared their sales.

  21. The second part of the assessment was that the Appellants did not declare the VAT on the miscellaneous income from the phone, gaming machine and cigarettes sales. The Appellants contested this referring to a copy of the VAT summary for the three month period ending 30 September 2002 which showed that VAT on the miscellaneous income had been included on the VAT return. They also relied on the fact that the total of gross sales on the session memo pads was less than the value of gross outputs on most of the VAT returns. In their view the difference between the two sets of figures indicated that the miscellaneous income had been accounted for in the VAT returns.

  22. Mr Bourne's assessment for VAT on miscellaneous income appeared to derive from his concern that the Appellants had repeatedly failed to meet his request to supply the manual sheets upon which the income had been recorded for each of the periods under investigation. Mr Bourne only had the original records for period 09/01 which showed that the Appellants received £4,225 in miscellaneous income. Mr Bourne decided that the VAT on £4,225, which was £629, should be applied to all periods except 09/02 where an allowance of £328.43 should be given for the VAT disclosed in the VAT summary for that period.

  23. Mr Clarke explained that he provided the required records to his accountants which failed to pass them onto Mr Bourne. Mr Clarke supplied the Tribunal with several extracts from the manual records for miscellaneous income including the quarter ending December 2002.

  24. We find on balance that the Appellants did declare the VAT on miscellaneous income in the majority of their returns. We consider that the evidence of the VAT summary for September 2002 and the comparison of the gross sales on EPOS and VAT returns lend support for our finding. Further Mr Bourne's assertion of non-declaration of miscellaneous income was contradicted by his evidence that he matched most of the quarterly output tax figures on the EPOS VAT breakdown sheets to the output tax declared on the corresponding VAT returns.

  25. On the evidence we decide that the Appellant failed to account for VAT on miscellaneous income in three returns 03/02, 12/02, 03/03. We had records of miscellaneous income for three periods: £2,205.20 (September 2002), £2,976.70 (December 2002) and £3,182 (September 2003) which produced an average three monthly income of £2,788 with VAT of £415. We prefer the three monthly average of £2,788 to Mr Bourne's proposal of £4,225. The £2,788 was derived from figures for returns included in the assessment, whereas the £4,225 related to the 09/01 quarter which had been excluded from the assessment. We, therefore, hold that the assessment for miscellaneous income is reduced to £1,245.

  26. The final part of the assessment was that the Appellants had not accounted for output tax on admission charges to late night functions. Mr Bourne considered that the Appellants failed to establish to his satisfaction that the admission charges were retained by promoters of the events. The Appellants at no time prior to the assessment provided independent corroboration that they did not keep the admission charges. Mr Clarke supplied Mr Bourne with the name of one promoter who did not respond to Mr Bourne's letter requesting confirmation that he retained the admission charges. Mr Bourne considered it unrealistic that the Appellants would not exploit commercially the benefits of a late night licence which was acquired in January 2003. Based on information given to him by Mr Clarke, Mr Bourne estimated that the Appellants received £18,120 in admission charges for late night events organised on a Friday and Saturday during the periods from 03/03 through to 06/04.

  27. In January 2008 the Respondents wrote to two other promoters, who also did not respond to their request for information. Mr Bourne referred to flyers advertising an event at the Appellants' premises on 26 December 2003 with admission charges of £20 and £26, which appeared to contradict the Appellants' evidence of a private birthday party at their premises.

  28. The Appellants produced in evidence a schedule of late night events held at their premises on Fridays and Saturdays from 3 January 2003 to 19 March 2004. No events were held until 28 June 2003 when the Appellants promoted an event involving disc jockeys on six separate nights over a period of one month. Mr Clarke stated that their promotions were not commercially viable. They had no experience with promotions and received a total of £440 in admission charges out of which they had to pay disc jockeys, the security staff and the advertising. The Appellants abandoned their venture following the unsuccessful trial.

  29. Sometimes after the trial they were approached by third parties to use their premises for late night private and public functions. The organisers of these functions were responsible for the security staff, disc jockeys and advertising in return for the revenue from the admission charges. The Appellants would retain the profits on the bar sales. This arrangement proved very successful for both parties, and carried no commercial risks for the Appellants.

  30. The schedule showed that four private birthday parties were held in the period subsequent to the unsuccessful trial. From 24 October 2003 a Dean Thomas promoted an event for seven consecutive Fridays. The Friday spot was then taken by a Victor Joseph who organised all subsequent Friday night promotions. A David Drummond was the promoter for Saturday events from 1 November 2003. At the hearing Mr Clarke supplied letters from a Dave Drummond dated 4 April 2008 and a Victor Joseph dated 4 August 2008 and witnessed by a Rachel Pickering stating that they promoted dances at the Appellants' premises on Friday and Saturday nights for which they were solely responsible for collecting the entrance money out of which they paid the security staff, disc jockeys and promotional expenses. They confirmed that The Mongolian Bar (name of the Appellants' business) did not receive any income from the entrance money.

  31. Mr Clarke pointed out that the flyer for the event on 26 December 2003 indicated that admission was by ticket only which was purchased from a ticket outlet, not from the Appellants' premises. The Appellants considered that the evidence of the flyer supported their contention that outside promoters received the admission charges for late night events held at the Appellants' premises.

  32. We preferred the Appellants' evidence of not receiving the admission charges for late night events except for the period of four weeks when they promoted them on a trial basis. We considered that Mr Clarke gave a convincing explanation for the arrangements with the promoters. Mr Clarke, albeit at the last moment, supplied letters signed by two promoters confirming that they collected the admission charges. The Respondents did not challenge the authenticity of the letters. The contents of the flyer and its reference to ticket sales from a ticket outlet supported the Appellants' version of events. In contrast Mr Bourne's case for the assessment was based on the Appellants' default in giving independent corroboration rather than concrete evidence that they regularly received the income from admission charges. In those circumstances the assessment for non-declaration of admission charges is reduced to £64.53 which was the VAT on the charges received during the trial period.

    33. Decision
  33. Our primary task on an Appeal against an assessment to VAT is to find the correct amount of tax with the evidential burden upon the Appellants (Customs and Excise Commissioners v Pegasus Birds Ltd [2004] STC 1509). Whilst we held reservations about the general overview of the Appellants' business as revealed by the analysis of the VAT returns, we found Mr Clarke's evidence for the Appellants on the particular aspects of the assessment persuasive. We formed the view that Mr Clarke was an honest witness who gave his evidence in a straightforward manner. Mr Clarke backed up his oral testimony with documentary evidence. Our findings of fact on the whole supported the Appellants' case. We find that

    34. (1) No under-declaration of sales by the Appellants during the disputed periods.
    (2) The assessment for VAT on miscellaneous income is reduced to £1,245.
    (3) The assessment for VAT on admission charged is reduced to £64.53.
  34. We, therefore, reduce the assessment to £1,309.53 plus interest, and allow the Appeal in part. The Appellants did not request their costs in connection with the Appeal. We, therefore, make no order for costs.

  35. Our decision should in no way be interpreted as a criticism of Mr Bourne's decision to raise the assessment. We consider his decision at the time of making it was fully justified on the basis of the information before him, and the Appellants' failure to respond to his requests. The Appellants blamed their representatives for not forwarding the relevant information onto Mr Bourne. Much of the Appellants' evidence before the Tribunal emerged after making the assessment. Mr Bourne was unaware of this evidence until he was required to make a witness statement for the Tribunal.

    36. MICHAEL TILDESLEY OBE
    CHAIRMAN
    RELEASE DATE: 22 August 2008

    MAN/05/307

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