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Derek Andrew Dawkins & Monica Elizabeth Dawkins (t/a Scandanavia Coffee House v Revenue & Customs [2008] UKVAT V20843 (24 October 2008)

20843

Value Added Tax - Assessment to reduce the percentage of zero-rated take-away sales at a coffee house - Whether Inspector's review and decision were made "to best judgment" - Appeal allowed

LONDON TRIBUNAL CENTRE

DEREK ANDREW DAWKINS & MONICA ELIZABETH DAWKINS Appellants

T/A SCANDANAVIA COFFEE HOUSE

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Tribunal: HOWARD M NOWLAN (Chairman)

MRS R S JOHNSON

Sitting in public in London on 13 October 2008

Derek Dawkins in person, on behalf of the Appellant partnership

Gloria Orimoloye of HM Revenue & Customs Solicitor's Office, for the Respondents

© CROWN COPYRIGHT 2008

DECISION

Introduction

This was an appeal by the partners operating the Scandinavia Coffee House in Bury St. Edmunds against an assessment for £8,003, increasing the VAT chargeable on the Appellants in respect of their trading from the VAT period 08/2004 to the period 02/2006. The assessment followed an enquiry prompted by the observation that the percentage of zero-rated sales attributable to take-away food sales had increased in that period, over the levels of take-away sales in earlier periods. On discovering that the Appellants had not retained evidence, such as till-rolls or paper customer receipts, on which their split of turnover had been based, the Officer carried out a review of sales in a 6 week period after her initial visit to the Appellants, the review being for the period from 16 May 2007 to the end of June 2007. The percentage of zero-rated sales in that period varied between 32.81% for the two weeks of May and 35.6% for the month of June. Since the average percentage of zero-rated sales for the earlier period in contention had been approximately 46.4%, the Officer applied the 35.6% figure to re-calculate reduced zero-rated sales for the seven periods in dispute, and assessed the £8,003 as additional VAT for those period.

Having been addressed on the conventional tests that we must apply in relation to considering whether the Officer exercised her "best judgment" in estimating zero-rated turnover for the relevant periods in the absence of the primary sales records, we proceed on the basis that under the Van Boeckel test, all as re-summarised by Mr. Justice Carnwath in Rathman (t/a Khayam Restaurant) v. C of C&E [1998] STC 826 we must first consider whether the Officer exercised "best judgment". The authorities demonstrate that this would certainly not be so if the Officer acted "dishonestly, vindictively or capriciously". Beyond that, although there will necessarily be an element of honest guesswork, when primary figures of turnover are missing, "some spurious estimate or guess in which all elements of judgment are missing" would not be acceptable. We understand thus that the first test that we must apply is this one of whether guesswork fell into that category in which "all elements of judgment were missing". Were we to conclude that the assessment was not made to best judgment, then we should allow the appeal. Were we on the other hand to decide that the assessment was made to best judgment, then we could still, in operating the second conventional test, reduce the assessment if we considered, on the evidence that we had heard, that it was appropriate to reduce it.

Our decision is that while the Officer conducted a perfectly satisfactory test of the proportion of zero-rated sales to standard-rated sales in the test period that she chose, she applied the resultant percentage to the earlier periods with totally inadequate consideration as to whether it was appropriate to do that, and so we consider that she failed to exercise "best judgment". We thus allow the appeal.

The expression of % figures in this decision

Whilst it is a very minor point, we should mention that there was some slight complication in the hearing in that some figures that compared levels of standard-rated and zero-rated turnover used VAT inclusive figures for the standard-rated turnover, and others used VAT-exclusive figures for standard-rated turnover. This marginally altered the percentage ratio of one to the other and for the sake of simplicity we have used in this decision VAT-inclusive figures for standard-rated turnover, and we will not refer to this point again.

The evidence and the facts

Evidence was given to us by Mr. Dawkins, and to some small extent by Mrs. Dawkins, the two partners in the business, in relation to how the business produced its records, how business had fluctuated, and to what had been discussed with the Customs Officer, Gillian Parkes. Evidence was given by Gillian Parkes in relation to the background to her enquiry, the test that she conducted, and the reasons why she applied the % figure derived from her test to all the earlier periods. Minor evidence was given by her manager, Mike Chapman, but there is no need to record this.

Gillian Parkes gave her evidence first. She summarised the way in which the ratio of zero-rated take-away turnover at the coffee shop had progressively increased from 7% in 1996, to 14.5% in late 1998, 30% in February 1999, and 42.5% in May 1999. She then described that there had been two earlier VAT reviews, the last in 2004, and that at the time of that last review, she mentioned that the ratio of zero-rated turnover had been fluctuating within a 10% band, but was on average just below 40%. The officer who had conducted the review in 2004 had made no adjustments to the relevant ratio, but he did indicate and confirm in a letter that the traders should keep and maintain their primary records so that they could always be verified for VAT purposes. The Appellants claimed not to have received that letter. Whether they received it, and considered it of little consequence when their VAT affairs had not been adjusted or challenged we do not know.

Gillian Parkes then described how she had noted from HMRC records that the ratio of zero-rated turnover to standard-rated turnover had increased to the average figure of 46.4% for the seven three-month VAT periods between 08/2004 and 02/2006, so that she decided to visit the Appellants to verify the figures. On making a visit in mid-May 2007, she discovered that the Appellants had not retained till rolls or indeed any other primary method of recording turnover. Accordingly she was unable to verify figures for the past period. She obviously complained that the Appellants should have kept the relevant records and she reminded them that the officer conducting the 2004 visit had told them, and confirmed in writing, that they should keep the records. In the absence of the records, however, all that she could do was to ask them to keep all the records for a test period, whereupon she would make a return visit and check the customer receipt slips against the print-outs that showed daily and weekly figures for zero-rated and standard-rated takings.

We should explain at this point that the Appellants calculated their two categories of turnover and compiled their figures in the following way. Firstly, they made little use of the till in these calculations, first because the till produced only one paper slip which was handed to the customer, and secondly because the till was old fashioned and with different people using it, it generated many errors. Instead therefore, they relied on the paper Customer Order slips, on which there was always recorded either a table number, for meals consumed on the premises, or the initials T/A for take-away sales. At the end of each day they reconciled the Customer order slips with the cash and cheques taken in the till (they did not offer credit or debit card facilities) and usually had to make minor adjustments when there were minor discrepancies. They then recorded the slightly adjusted totals for zero-rated and standard-rated sales on a daily basis, and as just mentioned the fairly efficient print-outs that we were shown of this record illustrated the daily figures, and the total figures for each week.

Gillian Parkes returned to compare the records taken during the test period. On her calculations, the percentage of zero-rated sales was 32.8% for the two weeks that she reviewed in May 2007 and 35.6% for the whole month of June 2007. There was relatively little discussion between the Appellants and Gillian Parkes at the time. Mrs. Dawkins must have said something along the lines that they were currently trying to increase their zero-rated turnover and that she had just gone round, or written to, all of the bus and coach companies to try and get them to resume their earlier practice of periodically ordering take-away sandwiches in some quantity for their coach customers. There was also some discussion about a fact that Gillian Parkes had noted which was that in the earlier period being questioned, zero-rated sales had always been set at a round figure of never less than £10, which she thought suggested that the Appellants might just have inserted guessed or estimated figures for the zero-rated turnover. Mr. Dawkins explained this by saying that there were often slight discrepancies between the Customer Order Slips and the till takings, and that rather than undertake a difficult and sometimes fruitless endeavour to reconcile the two, they would generally just round down the zero-rated figure to the nearest £10, thereby in a sense understating the zero-rated turnover and slightly boosting the balance.

There was also some discussion about a separate line of turnover geared to the fact that Mr. Dawkins at one point took on a contract to provide catering services to the local golf club. At a time this turnover was recorded in the coffee house books, but later Mr. Dawkins decided to conduct this business on his sole account, and became separately registered for VAT purposes in relation to this business. By the time of the hearing, the Appellants had in fact sold the coffee house business, and Mr. Dawkins had ceased to operate the separate catering business for the golf club. In the event it transpired that absolutely nothing hinged on the one-time inclusion of figures geared to the golf club catering in those for the coffee house. The former figures were always extracted first, before producing figures for zero-rated and standard-rated takings in the coffee house, and the golf club supplies were always treated rightly as standard-rated supplies. We mention these facts simply because Gillian Parkes had been troubled at one time as to whether these figures confused or obscured something, and we conclude that they did not.

Mr. and Mrs. Dawkins both gave evidence, Mr. Dawkins formally on oath, and Mrs. Dawkins somewhat informally from the body of the court. Without anticipating the reasons given for our decision we have to say immediately that we both found Mr. and Mrs. Dawkins to be transparently honest. In a slightly amusing way they periodically corrected and contradicted each other, and this very much gave the impression that they were both telling the truth, rather than producing some scripted version of events.

Mr. Dawkins confirmed the various unsatisfactory features of their old till, and both Mr. and Mrs. Dawkins said that they would have liked to buy a more modern and efficient till, but as it cost £11,000 they could not afford it. In the way already described Mr. Dawkins summarised the way in which the table numbers or T/A indications on the Customer Order forms were used to generate the daily figures for zero-rated and standard-rated turnover, and he said that he had never really appreciated that he was meant to be keeping what would amount to literally thousands of pieces of paper, in case the VAT authorities might wish to check them. They did have of course the print-outs already referred to which showed the two categories of turnover on a daily, and weekly, basis.

Mr. Dawkins described the way in which turnover had fluctuated, and he very much said that the period currently in contention had been "the good times", when clearly the HMRC quarterly return figures demonstrated not only that the take-away turnover had been at its highest, but total quarterly takings had also been at high levels. Mr. Dawkins said that much of the take-away turnover was derived from tourists, and that a significant amount had been obtained from coach companies which had pre-ordered sandwiches for their clients. Much of this trade had declined by 2007, and it was for this reason that Mrs. Dawson had mentioned to Gillian Parkes that she had contacted or written to the coach companies trying to get them to resume their practice of ordering take-away meals. Mrs. Dawkins said that she had no reply from any of the coach companies except one, which we were shown. This indicated that coach customers had for some reason decided that it was more interesting to visit Kent than Bury St. Edmunds so that most trips to that town had regrettably been withdrawn.

Mr. and Mrs. Dawkins both described the way in which the market had changed in recent years. Theirs had been the first, or one of the first, coffee shops in the town but there were now about 30. One had opened up recently selling solely take-away food, and generally the competition had increased whilst the tourist interest had regrettably been falling. Trade thus became a struggle and this was why they had sold the business and closed the golf club catering operation. Both were approaching retiring age. Mr. Dawson expressed some criticism that someone from HMRC could descend on them; engage in virtually no discussion; and then present random figures all in relation to the period when their business had been doing particularly well, and submit a bill for a sizeable amount of VAT. He asserted that other evidence than till rolls must be acceptable where till rolls were not available, and although he regretted that he was meant to have kept the Customer Receipts for verification, he said on several occasions that he had never understood that he was meant to keep literally boxes and boxes of such receipts.

Our decision

We entirely accept that Gillian Parkes was right to criticise Mr. Dawson for not having retained the evidence of the split in the business turnover, between zero-rated and standard-rated items. We note in passing that if the Appellants had been trying to defraud HMRC the retention of the Customer Receipts would not have been all that great a hindrance since there could as easily have been a sloppy practice in recording the two categories of turnover on some of the Customer Receipts, as there could have been an opportunity to distort the daily totals and mis-record the figures on the daily and weekly schedules, and destroy the Customer Receipts. Nevertheless it is indisputable that the Appellants had failed to keep certain records, as they should have done, and that inevitably leaves them in an exposed position when HMRC officers have to use their best judgment to verify and adjust figures.

We also accept that Gillian Parkes pursued the only course that she might follow when she decided to conduct the check of receipts against daily and weekly totals in the 6 weeks of May and June 2007.

During the first part of the hearing we had given considerable attention to the figures of quarterly turnover in relation to the two categories of turnover in all periods spanning the period covered by the earlier 2004 review, the period now in contention (08.2004 to 02/2006), and the subsequent period up to the end of February 2007. We were unable to discern any clear trends from these figures, save for the obvious point that turnover was down markedly in the winter months, and that there were fairly significant variations between the various periods.

Having regard to the time spent on considering the figures for the period in contention, we were very struck by eight factors that lead us to conclude that, whilst Gillian Parkes performed a perfectly adequate test sample in the only way that she could do, she thereafter failed to exercise her judgment in an adequate manner.

Those eight respects were as follows:

• She accepted first, though she had not made this clear in her initial statement, that when she undertook her test, the Customer Receipts indeed tallied with the daily and weekly totals. We obviously appreciate that since the Appellants were on notice that the two would be compared, it would have been stupid, had the Appellants been earlier destroying inconsistent Customer Receipts, for the Appellants to have allowed any inconsistencies to continue during the test period. No-one made the point, however, that for this reason the test sample was fairly useless. It admittedly might have achieved the point of preventing the Appellants from boosting the daily and weekly totals to inflated figures and we accept that the percentage of zero-rated sales for the 08/2007 period was below those for any other period except one. However the fact remains that there was not shown to be any discrepancy between the Customer Receipt figures and the daily and weekly totals.

• We were not initially shown the HMRC records for the VAT periods that covered the sample period, and indeed the results for the four remaining periods that covered the period from February 2007 to February 2008 when the business was sold. When these were faxed to us we noted, again with interest, that the figures returned by the Appellants for the period covering the test period tallied with the results obtained by Gillian Parkes in her test sample. It may again be said that they obviously would do but they certainly did. Thus all that Gillian Parkes knew was that the figures were lower for the test period, and not that any inconsistency of any sort had actually been detected.

• In the light of the first two points, and of the fact that the various percentages and turnover figures generally had fluctuated quite markedly, we consider that Gillian Parkes, in exercising best judgment, should have done much more in terms of trying to discover whether take-away turnover had genuinely fallen in the test period, and notably in the five periods preceding the test period, against the levels prevailing in the period when she made her adjustments. We consider it to be very significant that the percentage of take-away sales in the 7 periods adjusted were at the levels 40%, 47%, 47%, 44.6%, 49.3%, 58.4% and 43%. In the following four periods, all of which pre-dated the first contact made by Gillian Parkes, those figures had changed to 34%, 42%, 43% and 42%. Gillian Parkes chose to confine her adjustment to the first 7, and not the next 4, but appeared to give no thought to the clear fact that if the Appellants had been mis-recording figures in the 7 periods (effectively "fiddling the books"), it is odd that they had the foresight to stop the practice at least a year before Gillian Parkes first contacted them. This must, or at least should, have revealed that the low figure in the test period may have been part of a pattern of declining take-away turnover, rather than an indication that the Appellants were no longer able to fiddle the books in the test period.

• One of the points made by the Appellants was that Gillian Parkes entered into no dialogue with them, and just went away with her figures and eventually made the assessments. She might legitimately say that the Appellants had an opportunity to advance all sorts of arguments, but failed to do so. However, we are quite satisfied that Mr. Dawkins, first and foremost the chef, never quite appreciated what Gillian Parkes was planning. Thus their failure to advance arguments, before the adjusted figures had resulted in the assessment, stemmed largely from bemusement. By contrast we consider that Gillian Parkes failed to seek to verify whether take-away turnover was genuinely declining, or whether she had caught the Appellants out, so that they had had to terminate their practice of inflating that turnover, rather oddly beginning this process at least a year before she approached them.

• The chance remark that led Gillian Parkes to assume that take-away turnover was actually increasing, rather than falling, was a remark made without follow-up by Mrs. Dawkins, to the effect that she was trying to boost and increase take-away turnover, and she mentioned that she was chasing the coach companies. On the supposition thus that take-away turnover was being boosted, Gillian Parkes took that to be a major indicator that the low figure for the test period must have revealed that the take-away turnover in the earlier "adjusted" period, although recorded as being higher, would actually have been lower. It was perfectly clear from their evidence that the reason the Appellants were chasing up the coach companies was that this turnover had fallen off, and the chasing exercise was an effort, in the event a totally unsuccessful effort, to reverse that decline. Gillian Parkes advanced this point as possibly the main reason for suspecting that the percentages for the "adjusted" period had been manipulated, whereas we consider that had she engaged in any proper dialogue in this context, she would have seen that Mrs. Dawson's chance remark and reference to chasing up the coach companies, demonstrated the reverse of the conclusion she drew from it.

• Whilst Gillian Parkes had gathered that there was competition from one identified "household name" coffee business, of which she had been disputing the date, we heard in evidence that about 30 competitors had opened and that Bury St. Edmunds was awash with coffee-shops with both pavement seating, and take-away businesses. One take-away business had opened opposite the Appellants' premises. No thought appears to have been given to the increase in the competition generally.

• Gillian Parkes adjusted the take-away percentage of turnover for all seven "adjusted periods" to the single figure of 35.6%. This seems very arbitrary when there was a disparity in the declared percentage of take-away turnover in the adjusted years from 40% to 58.4%. Unless it was supposed that there was more rampant fiddling in the latter period, the adjustment of all figures down to 35.6% seems extraordinarily arbitrary. It also seems odd that in the period prior to that for which adjustments were made, in other words the period already reviewed by Gillian Parkes' predecessor, there were some years with higher percentages than those in the adjusted period. Gillian Parkes may have considered that her colleague failed to spot the fraud, and that she could not go back to earlier periods. This would still leave unexplained why two of the periods adjusted had lower or equal take-away turnover percentages than some of the four following periods when she chose not to adjust. Plainly take-away percentages were then falling, a year before her visit, but two of the adjusted periods were at no higher level.

• We finally make possibly the most important point. Mr. and Mrs. Dawkins struck as both as being honest. The first two bullet points above illustrate that there is actually no evidence that they have miss-recorded anything. Mr. Dawkins may have failed to keep records as he should have done, and again we note that had been really been fraudulent, he could have manipulated the primary records, kept them, and rendered Gillian Parkes' exercise to be as difficult as it was. But we do not believe that this couple were fraudulent.

Having summarised the respects in which we consider that Gillian Parkes failed to exercise best judgment in this case, we confirm that in an appropriate case we would see no problem with the results for a short test period being applied to a much longer period; indeed often nothing else would be feasible. Such an approach would be likely to be entirely acceptable when clear fraud was revealed in the test period. In this case it was not. But we confirm that we have not reached our decision on any basis geared to a general proposition that the results of too short a test period have been used to effect an adjustment for too long a period.

We accordingly allow this appeal on the first relevant basis. In other words because we consider that Gillian Parkes, albeit certainly not being capricious, vindictive or remotely dishonest, still failed to exercise best judgment in the required manner, the additional assessment is discharged.

HOWARD M NOWLAN

CHAIRMAN

RELEASED: 24 October 2008

LON 2007/1605